Definition
Accelerated depreciation is any depreciation approach that allocates a larger portion of an asset’s cost to the earlier years of its useful life and smaller amounts later. Depreciation is the systematic allocation of an asset’s cost over its expected service life. Accelerated methods contrast with straight-line depreciation, which spreads expense evenly across periods.
Why firms use accelerated depreciation
– Matches expense recognition to heavier early-period use when an asset is newest and most productive.
– Defers taxable income in early years because higher depreciation reduces reported profit for tax purposes, effectively pushing some tax payment to later years.
– Can reduce reported net income in early periods, which some externally reported companies may avoid for signaling reasons.
How accelerated depreciation affects financial reporting
– Higher depreciation expense early → lower operating income and net income in early years, higher income later as depreciation falls.
– Cash flow (operating cash flow after tax effects) may improve initially because tax payments are reduced; accounting profit and cash flows diverge.
– Choice of method must be disclosed and applied consistently; it affects comparability across firms.
Main accelerated methods (overview and formulas)
1) Double-declining balance (DDB)
– Concept: apply a constant multiple of the straight-line rate to the carrying amount (book value) each period.
– Formula: DDB rate = 2 × (1 / useful life).
– Depreciation expense in a period = DDB rate × beginning-period book value.
– Stop or adjust in the final periods to ensure book value does not fall below salvage value.
2) Sum-of-the-years’-digits (SYD)
– Concept: allocate a depreciable base using fractions that decline each year.
– Formula: digit sum = n(n + 1) / 2 where n = useful life in years.
– Fraction for year t (t = 1 is first year) = (n − t + 1) / digit sum.
– Depreciation expense = fraction × (cost − salvage value).
Step-by-step checklist when using accelerated depreciation
– 1) Confirm asset cost and estimate useful life.
– 2) Determine an appropriate salvage (residual) value, if any.
– 3) Choose the depreciation method (DDB, SYD, straight-line, etc.) and document rationale.
– 4) Compute the depreciable base = cost − salvage value.
– 5) Apply the chosen formula each period; for DDB use beginning book value each period.
– 6) Ensure book value never falls below salvage value—adjust final period if required.
– 7) Disclose method and estimates in financial statement notes.
– 8) Check tax rules and required methods for tax filing (rules differ by jurisdiction).
Worked numeric examples (same asset for both methods)
Assumptions: Purchase cost = $10,000; salvage value = $0; useful life = 5 years. Depreciable base = $10,000.
A) Double-declining balance (DDB)
– DDB rate = 2 × (1 / 5) = 40%.
– Year 1: expense = 40% × $10,000 = $4,000. Book value end = $6,000.
– Year 2: expense = 40% × $6,000 = $2,400. Book value end = $3,600.
– Year 3: expense = 40% × $3,600 = $1,440. Book value end = $2,160.
– Year 4: expense = 40% × $2,160 = $864. Book value end = $1,296.
– Year 5: expense = 40% × $1,296 = $518.40, but you may need a small final adjustment so total depreciation equals $10,000 (with zero salvage). Remaining depreciation to reach $10,000 = $10,000 − sum(years 1–4) = $10,000 − $8,704 = $1,296, which equals the last-period book value — use that as the final year’s depreciation.
B) Sum-of-the-years’-digits (SYD)
– Digit sum = 1 + 2 + 3 + 4 + 5 = 15 (or n(n + 1)/2 = 5×6/2 = 15).
– Year 1 fraction = 5/15 = 33.33% → expense = 0.3333 × $10,000 = $3,333.33.
– Year 2 fraction = 4/15 = 26.67% → expense = $2,666.67.
– Year 3 fraction = 3/15 = 20% → expense = $2,000.
– Year 4 fraction = 2/15 = 13.33% → expense = $1,333.33.
– Year 5 fraction = 1/15 = 6.67% → expense = $666.67.
Total = $10,000.
Special considerations and limitations
– Alignment with use is desirable but not mandatory; companies should choose the method that best reflects consumption of economic benefits.
– Tax rules in many jurisdictions set allowable methods and lives; following tax law does not always equal financial reporting practice.
– For public companies, management may weigh the trade-off between early tax deferral and lower reported earnings.
– Estimates (useful life, salvage) are judgments and should be revised prospectively if circumstances change.
Quick takeaway
Accelerated depreciation front-loads expense to early years, often matching heavier early usage and providing near-term tax deferral. Two common accelerated formulas are double-declining balance (percentage applied to book value) and sum-of-the-years’-digits (declining fractions of the depreciable base). Choose and document the method carefully and follow applicable tax and financial-reporting rules.
References (for further reading)
– Investopedia — “Accelerated Depreciation”
https://www.investopedia.com/terms/a/accelerateddepreciation.asp
– U.S. Internal Revenue Service — Publication 946, How To Depreciate Property
https://www.irs.gov/publications/p946
– Financial Accounting Standards Board (FASB) — Official site (accounting standards and guidance)
https://www.fasb.org
– International Financial Reporting Standards (IFRS) — IFRS Foundation (for international accounting rules)
https://www.ifrs.org
Educational disclaimer
This explainer is for educational purposes only and does not constitute individualized tax, accounting, or investment advice. For specific accounting policies or tax treatment, consult a qualified accountant or tax professional and the applicable laws and standards.