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Accelerated Depreciation Methods


Chapter 6 (/academy/topic/depreciation-salvageCourse Progress (/academy/course/business-math.html#courseProgressAnchor)
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Instructor: Jennifer Reed

When it comes to calculating depreciation amounts for large oce equipment or vehicles, there are two
common methods that allow you to calculate more depreciation in the rst 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 nancial
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 nancial reports and
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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 rst 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 rst 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 10 years, the basic depreciation percent per year is 100% divided by 10 years or 10% per
year. Multiplying $120,000, the value of the item for year 1 by 10 percent, or 0.1, gives an
annual depreciation of $12,000 for your basic depreciation for year 1.
The depreciation using the double declining balance method for the rst 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 rst year.
For year 2, 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 2. It is $96,000*0.2 =
$19,200. Keep doing this until you have depreciated your value down to 0.

Example
Let's look at another example.
You also have this high end scanner that you bought for $90,000. It has a lifetime of 5 years.
Calculate the depreciation for the rst two years using the double declining balance method.
A lifetime of 5 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 1, the depreciation
is $90,000*0.4 = $36,000. For year 2, the value drops to $90,000 - $36,000 = $54,000. The
depreciation for year 2 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 rst few years. This method is called sum of the years' digits. Using this
method, the depreciation percentage is greatest for year 1 and decreases each year based on
the life of the item. Ron shows you an example using the same printer that you bought for

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$120,000 with a life of 10 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.
To calculate the depreciation percentage for each year, you divide each year by the total. So for
year 1, the depreciation percentage is 10/55. For year 2, it is 9/55. For year 3, it is 8/55. And you
keep going until you reach year 10 with a depreciation percentage of 1/55. Each year you
multiply this percentage by the original cost of the item. So year 1 has a depreciation of
$120,000*10/55 = $21,818.18. Year 2 has a depreciation of $120,000*9/55 = $19,636.36. Of
course, like all depreciation methods, you keep going until you reach a depreciated value of 0.

Example
Let's go back to the scanner and calculate the depreciation using the sum of the years' digits
for years 1 and 2.
The scanner has a life of 5 years. So the sum of the years' digits is 1 + 2 + 3 + 4 + 5 = 15. Year 1
has a depreciation percentage of 5/15. Year 2 has a depreciation percentage of 4/15. The cost
of the scanner is $90,000. So the depreciation for year 1 is $90,000*5/15 = $30,000 and Year 2
is $90,000*4/15 = $24,000.

Lesson Summary
As you can see, the depreciation amounts are a bit different for each method. The method you
choose depends on how much you want to depreciate the rst few years and also on how
much more use you get out of the item in the rst few years.
Now, let's review what we've learned. Depreciation means you calculate the loss of value in
your equipment. Accelerated depreciation means you depreciate more in the rst few years
of use of an item. There are two common accelerated depreciation methods you can use.
First is the Double declining balance method. This method takes your basic depreciation
percentage for the year and doubles it. You then take this percentage and multiply it by the
current value of your item. For example, if an item has a life of 10 years, the basic depreciation
percentage is 10%. The percentage using the double declining balance method is 20% per
year. Each year, you multiply the current depreciated value of the item by the percentage.
The next method is the sum of the years' digits. Using this method, the depreciation
percentage is greatest for year 1 and decreases each year based on the life of the item. To use
this method, you add the years of the item. For example, an item with a life expectancy of 5
years has a sum of the years' digits of 1 + 2 + 3 + 4 + 5 = 15. Year 1, then has a depreciation
percentage of 5/15. Year 2 has a depreciation percentage of 4/15. Year 3, 3/15. Year 4, 2/15.
And year 5, 1/15. Each year, you multiply this percentage with the original cost of the item.

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