Accelerated Depreciation Methods

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  • 0:02 Accelerated Depreciation
  • 1:10 Double Declining Balance
  • 2:50 Example 1
  • 3:47 Sum of the Years' Digits
  • 5:35 Example 2
  • 6:20 Lesson Summary
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Lesson Transcript
Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

When it comes to calculating depreciation amounts for large office equipment or vehicles, there are two common methods that allow you to calculate more depreciation in the first few years of the product's life. Learn about them in this video lesson.

Accelerated Depreciation

Meet Ron. He is an accountant, and he is here to help companies keep their financial documents in order. He is here at your printing company today to help you choose a depreciation method. Depreciation means you calculate the loss of value in your equipment. Whatever value is lost per year in your equipment you can write in your financial reports and then transfer the appropriate amount to your year-end taxes. By doing this, you are taking into account that your equipment loses value each year, and that affects your company's bottom line. When your equipment loses value, your company loses money.

The basic depreciation calculation assumes that the equipment is used steadily throughout its useful life. But sometimes, you need to make accelerated depreciation calculations. This takes into account that some items depreciate more in the first few years of use, so your depreciation amounts in these years are more than later years. There are two common accelerated depreciation methods.

Double Declining Balance

The first method that Ron is going to talk about is the double declining balance method. This method takes your basic depreciation percentage for the year and doubles it and multiplies it by the current value of your item.

So, for example, if you were depreciating one of your large printers that cost $120,000 with a life of ten years, the basic depreciation percent per year is 100% divided by ten years or ten percent per year. Multiplying $120,000, the value of the item for year one by ten percent, or 0.1, gives an annual depreciation of $12,000 for your basic depreciation for year one.

The depreciation using the double declining balance method for the first year is $120,000 times 20%, or 0.2, double the percentage used for the basic depreciation calculation. This works out to be $24,000 for the first year.

For year two, the printer has then dropped in value by $24,000 since that is the depreciation you calculated the year before. Subtracting this from the original cost of $120,000 gives $96,000. Multiplying this $96,000 by 20% will give the depreciation for year two. It is $96,000 * 0.2 = $19,200. Keep doing this until you have depreciated your value down to zero.

Example 1

Let's look at another example. You also have this high end scanner that you bought for $90,000. It has a lifetime of five years. Calculate the depreciation for the first two years using the double declining balance method.

A lifetime of five years gives a basic depreciation of 20% per year (100% divided by 5). Doubling this gives 40% per year for the double declining balance method. For year one, the depreciation is $90,000 * 0.4 = $36,000. For year two, the value drops to $90,000 - $36,000 = $54,000. The depreciation for year two is $54,000 * 0.4 = $21,600.

Sum of the Years' Digits

Ron now goes on to tell you that there is another method you can use to accelerate your depreciation in the first few years. This method is called sum of the years' digits. Using this method, the depreciation percentage is greatest for year one and decreases each year based on the life of the item. Ron shows you an example using the same printer that you bought for $120,000 with a life of ten years. This method is called the sum of the years' digits because you add up the years of life that the item has: 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10. This gives you a total of 55.

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