Accelerated depreciation is a method of allocating the cost of a capital asset over its useful life in a way that allows for a larger deduction in the earlier years of the asset’s life. Unlike the straight-line depreciation method, where an equal amount of depreciation expense is recognized each year, accelerated depreciation front-loads more depreciation expense in the early years, providing tax benefits and better reflecting the asset’s actual decline in value.

Two common methods of accelerated depreciation are the double declining balance method and the sum-of-the-years-digits method. Here’s an overview of each:

1. **Double Declining Balance Method:**
– **Formula:** Depreciation Expense = (2 / Useful Life) × Book Value at the Beginning of the Year
– In this method, the depreciation expense is calculated as a fixed percentage (2/useful life) of the asset’s book value at the beginning of the year. The book value is reduced by this calculated depreciation each year.

– **Example:**
– Let’s say a company purchases equipment for $10,000 with a useful life of 5 years.
– Year 1: (2/5) × $10,000 = $4,000
– Year 2: (2/5) × ($10,000 – $4,000) = $2,400
– And so on…

2. **Sum-of-the-Years-Digits Method:**
– **Formula:** Depreciation Expense = (Remaining Useful Life / Sum of the Years’ Digits) × (Cost – Accumulated Depreciation)
– The sum-of-the-years-digits method considers the total number of years in an asset’s useful life. The depreciation expense is calculated by multiplying the remaining useful life by a fraction where the numerator is the remaining useful life and the denominator is the sum of the years’ digits.

– **Example:**
– Let’s continue with the $10,000 equipment over 5 years.
– Sum of the years’ digits = 5 + 4 + 3 + 2 + 1 = 15
– Year 1: (5/15) × ($10,000 – $0) = $3,333.33
– Year 2: (4/15) × ($10,000 – $3,333.33) = $2,666.67
– And so on…

Accelerated depreciation provides businesses with the advantage of higher depreciation deductions in the early years, which can result in lower taxable income and, consequently, reduced tax liabilities. This can be especially beneficial when the asset is expected to have a higher utility or value in its earlier years, reflecting a more realistic depiction of its economic usefulness. However, it’s important to note that while it provides short-term tax benefits, it reduces the total depreciation that can be claimed over the asset’s life. Additionally, accounting standards may require a company to use methods that reflect the asset’s actual pattern of economic benefits over its useful life.