Accelerated depreciation is referred to those methods where the asset cost is depreciated at a faster rate than the straight-line method and therefore it leads to larger depreciation expenses in the earlier years than the later period of the asset’s useful life.
An asset is largely used at the beginning of its life when it is still new, efficient, and highly functional. The accelerated depreciation method matches the asset’s heavy use. As the asset ages, it is used less heavily and is phased out to favor a newer asset.
The main purpose of using this method is the belief that assets are more productive in the early years than later years. Declining Balance Method and Sum of Years Digit Method are the two such popular methods.
Types of Accelerated Depreciation Method
- Double-Declining Balance Method of Depreciation
The declining balance method is an accelerated depreciation method. After taking the reciprocal of the useful life of the asset and doubling it, this rate is applied to the depreciable base—also known as the book value, for the remainder of the asset’s expected life.
Under this declining balance method, a constant rate of depreciation is applied to an asset’s book value each year, which results in accelerated depreciation. Most commonly used is the rate of depreciation is 2X of the straight-line method known as a double-declining depreciation method.
The basic formula to calculate depreciation using the double-declining method is
- Sum of Years Digit Method
The sum-of-the-years’-digits (SYD) method also allows for accelerated depreciation. To start, combine all the digits of the expected life of the asset. For example, an asset with a five-year life would have a base of the sum-of-the-digits one through five, or 1 + 2 + 3 + 4 + 5 = 15. Sum of Year Digit Depreciation is an accelerated depreciation wherein the depreciation is calculated using the following formula:
Sum of year depreciation = Number of useful years remaining/sum of useful years * (Depreciable amount)