ACCELERATED DEPRECIATION Meaning and
Definition
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Accelerated depreciation refers to a method of calculating the reduction in value of an asset for accounting purposes, where the depreciation expenses are higher in the early years and gradually decrease over time. This approach allows businesses and individuals to claim larger tax deductions for the depreciation of their assets in earlier years, resulting in accelerated tax savings.
Under regular depreciation methods, the value of an asset is spread out evenly over its useful life, resulting in equal annual depreciation expenses. However, under accelerated depreciation, a higher depreciation expense is allocated to the early years of an asset's life, and gradually decreases over time. This is typically achieved by using different accelerated depreciation methods, such as the double-declining balance method or the sum-of-the-years' digits method.
The purpose of accelerated depreciation is to reflect the economic reality that most assets are more productive and valuable in their initial years of use, gradually declining in value and productivity over time. By recognizing this pattern, businesses can align their tax deductions with the actual economic benefits derived from the asset.
Accelerated depreciation provides businesses with the advantage of larger tax deductions in the earlier years, which can help to reduce taxable income and, by extension, tax liabilities. This accelerated recognition of asset depreciation can provide businesses with increased cash flow in the earlier years of asset ownership and may also enhance the overall profitability of the entity. Moreover, it serves as an incentive for businesses to invest in new assets, as the accelerated tax deductions can provide a financial advantage.
Etymology of ACCELERATED DEPRECIATION
The word "accelerated" in the term "accelerated depreciation" refers to the speed or rate at which the depreciation of an asset takes place.
The word "depreciation" comes from the Latin word "depretiare", which means to lower the value of something. In the context of accounting and finance, depreciation refers to the gradual decrease in the value of an asset over time.
The word "accelerated" is added to emphasize that the depreciation is taking place at a faster rate compared to traditional straight-line depreciation, where the asset's value decreases by the same amount each year. In accelerated depreciation methods, a higher portion of the asset's cost is allocated as an expense in the earlier years of its useful life.
The etymology of the term itself is derived from the meanings of the individual words "accelerated" and "depreciation", which have been applied in the specific context of accounting and taxation.
