Accelerated Depreciation is particularly used in the field of accounting and finance. It is a method of depreciating a fixed asset in such a way that higher amounts of the asset’s value is written off in the earlier years of its useful life as compared to the straight line method of depreciation. In the later years, smaller amounts are deducted from the asset’s value.
Let us imagine that a company buys a new machine for running their business. Instead of dividing the cost of purchasing the machine equally over its life, the company decided to allocate more of the cost during the initial years. This means that the the business is recognizing that the machine would lose more value in the early years.
The companies use this method for tax and accounting purposes as it allows them to lower their taxable income in the initial years after purchasing an asset. It is also used by them for corporate financial planning. Tax laws in many countries alow accelerated depreciation on certain type of assests for encouraging business investment.
For example:
- A company purchases a new equipment for Rs. 1,00,000 and it has a useful life of 5 years. When the company uses accelerated depreciation method such a double-declining balance, the company might write off Rs 40,000 in the first year and then Rs. 24,000 and so on rather than writing down rs 20,000 each year using straight-line method of depreciation.
Source: A to Z of Economics by Dr. NC Raghavi Chakravarthy