Accelerated depreciation method is a depreciation method that charges major portion of the cost of assets in earlier years and minor portion in later years of assets life.
This depreciation method defers tax liabilities in earlier years of assets life since higher depreciation expense reduces taxable income.
The logic behind accelerated depreciation method is that an asset produces more products and generates more revenue in earlier years. Thus, depreciation should be charged according to the productivity of assets.
Popular accelerated depreciation methods :
There are several accelerated depreciation methods in practice. Popular accelerated depreciation methods are
- Double-declining balance method
- Sum of the years’ digit method
In the USA, a business can apply accelerated depreciation method for computing income tax. On the other hand, they apply straight-line method for valuation of assets.
It is allowed by US tax regulations. This will likely result in Deferred income tax as a liability in organization’s financial statement.