Accelerated Depreciation

Many assets lose value fastest when new and become less productive as they age. Accelerated methods reflect this by front-loading depreciation.

A common example is the declining balance method. Under the double-declining balance version, an asset with a five-year life is depreciated at twice the straight-line rate, or 40% a year, applied to its remaining book value. For a machine costing 50,000, the first year's depreciation is 20,000. The second year's is 40% of the remaining 30,000, or 12,000. Straight-line depreciation, by contrast, would charge 10,000 every year if the machine had no residual value.

The total depreciation over the asset's life is the same under both methods; only the timing differs.

Accelerated depreciation is especially common for tax purposes. Many tax systems allow faster write-offs to encourage investment, because higher early deductions reduce taxable profit sooner. When a company uses accelerated depreciation for tax but straight-line in its financial statements, the difference creates a deferred tax liability, which reverses in later years.