Accelerated depreciation refers to methods of calculating an asset’s depreciation which recognize greater depreciation in the earlier years of an asset’s useful life.
Accelerated depreciation differs from straight-line depreciation, which recognizes an equal amount of depreciation expense each period. In contrast with straight-line depreciation, accelerated depreciation recognizes higher depreciation expense in the asset’s earlier years and lower depreciation in the asset’s later years. The total amount of depreciation is the same regardless of which method the company uses.
The two key methods of accelerated depreciation are the double-declining balance method and the sum-of-the-years’-digits (SYD) method .
Under the double-declining balance method, the company recognizes an asset’s depreciation expense at a rate twice the rate recognized under the straight-line method. For example, if an asset has a 10-year useful life, the company will recognize straight-line deprecation at a constant rate of 10% each year. The double-declining balance rate is 20% (2 x 10%). This percentage is applied to each period’s beginning carrying value until the asset is fully depreciated.
To calculate depreciation under the SYD method, the company sums each year of the asset’s useful life. For example, if the asset has a 10-year useful life, the sum-of-years is (1+2+3…+10) = 55. In the first year, the company recognizes depreciation expense of (10 / 55) of the depreciable base. In the second year, the company recognizes (9 / 55) of the depreciable base. The company continues these calculations into year 10.
Because accelerated depreciation yields greater tax benefits in the early years of an asset’s life, firms generally use accelerated depreciation for tax purposes.
