TYPES OF ACCELERATED DEPRECIATION

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Accelerated depreciation is a way of depreciating fixed assets that involves depreciating the asset more quickly than it would have under straight-line depreciation.

Unlike straight-line depreciation where equal depreciation expenses are charged for each year of an asset's usage, accelerated depreciation allows more depreciation expenses of being charged in the early years of an asset and less depreciation to be charged at the ending years of the asset.

A distinctive feature of accelerated depreciation is that it allows for higher depreciation charges in an asset's initial years and lower depreciation charges in the asset's later years.

Types of accelerated depreciation

There are three basic types of accelerated depreciation: sum-of-the-years digit depreciation, double declining balance depreciation, and reducing balance depreciation.

1. Reducing balance depreciation: This method of depreciation charges an annual fixed percentage to the asset book value.

Reducing balance depreciation involves applying a fixed percentage on the asset book value at the end of each year.

Dep=depreciation rate × asset's book value.

Reducing balance depreciation is considered an accelerated method of depreciation because it always results in higher depreciation in the early years of the asset and less depreciation in the latter years of an asset.

2. Double-declining balance depreciation: This is a method of depreciation where an asset is depreciated twice the rate of straight-line depreciation.

Double declining balance depreciation is, indeed, a combination of straight-line depreciation and reducing balance depreciation.

Double declining balance has characteristics of straight-line depreciation because it uses a fixed rate of appreciation, although this rate is twice that of straight-line depreciation.

Double declining has the characteristic of reducing balance depreciation because depreciation is charged on a fixed book value of an asset at the beginning of the year.

The following formula is used to calculate depreciation using the double declining balance method:

$$DBBD=\frac{2}{\text{Number of useful years}}×\text{book value of the asset}$$

Double declining depreciation is considered an accelerated method of depreciation because it allows you to charge a higher depreciation charge in the early years of an asset and lower depreciation charges as the asset nears its useful year.

3. Sum-of-the-years' digits depreciation: This is an accelerated method of appreciation where an asset is deprecated based on the sum of the year's digit and the number of years left for each year.

Sum-of-the-years' digits depreciation works like this: depreciation is higher in the first year than the second, higher in the second year than the third, and so on until the final year when an asset's value equals its scrap value.

To calculate sum-of-the-years' digit annual depreciation, it is as follows:

\[SOYD=\frac{\text{Remaining years of an asset}}{\text{Sum of the Year Digit}}×\text{Depreciable amount}\]

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