Accelerated depreciation methods allocate more cost of the asset to the earlier periods of asset’s useful life and lesser to the later periods. This is consistent with natural function of asset as it renders more befits in the starting periods of useful life and lesser benefits as it ages near the end of useful life. As the depreciation charge decreases gradually these methods are also called decreasing-charge methods of depreciation.
Unlike straight-line depreciation method that allocates cost evenly over the useful life assuming constant rate of benefits. Accelerated depreciation methods on the other hand are better representation of reality. As the asset ages, its efficiency falls and thus its effective use as well. Therefore, its more logical to provide lesser and lesser depreciation each period.
Considering the repair cost of asset, with the passage of time it requires more repairs, with decreasing depreciation charge under accelerated methods, overall periodic cost remains relatively same thus overall uniform figures to report in the income statement. Under straight-line method, however, depreciation and repair cost total increases and reach highest level near the end of useful life thus distorting the income statement figures as well.
There are many types of accelerated depreciation methods and some of them have further variants as well. Some of the widely known ones are following:
- Declining balance method also known as reducing balance method or diminishing balance method. One popular variant is double-declining balance method
- Sum of years’ digits method