Accelerated depreciation methods are used to allow the expenses that are depreciated from the assets to be applied earlier in the useful life of the asset. The reason for this is to reduce the net profit after taxes (NOPAT). If NOPAT is reduced in a given year, the amount of tax that a company pays is less by this amount.
In accelerated depreciation methods the total amount of depreciation is the same as in straight line depreciation, but the time that it is taken is much earlier in the useful life of the asset. This means that more equipment expense is recognized and lower taxes are paid in the early part of the useful life of the asset purchased. In later years the taxes will be higher than in straight line depreciation. Because of the present value of the money, taxes that are deferred to later years allow us to use that money in the present years.
Two types of accelerated depreciation are commonly used: sum of the years' digits and double declining balances.
Sum of the Years* Digits. There is no scientific basis for the sum of the years' digits method. There is no financial reason for using this calculation except that it has become a standard accounting practice.
The calculation is made by totaling the digits representing the years of the useful life of the equipment. Thus, as can be seen in table 3-4, for a ten year useful life, the total is 55 (10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55)-
In accelerated depreciation methods the total amount of depreciation is the same as in straight line depreciation, but the time that it is taken is much earlier in the useful life of the asset. This means that more equipment expense is recognized and lower taxes are paid in the early part of the useful life of the asset purchased. In later years the taxes will be higher than in straight line depreciation. Because of the present value of the money, taxes that are deferred to later years allow us to use that money in the present years.
Two types of accelerated depreciation are commonly used: sum of the years' digits and double declining balances.
Sum of the Years* Digits. There is no scientific basis for the sum of the years' digits method. There is no financial reason for using this calculation except that it has become a standard accounting practice.
The calculation is made by totaling the digits representing the years of the useful life of the equipment. Thus, as can be seen in table 3-4, for a ten year useful life, the total is 55 (10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55)-