By: Rowena De Guzman
Depreciation in accounting is the process of distributing the cost of an asset over its useful life to the entity. This is a deduction annual income tax that allows you to recover the cost or other basis of certain assets at the time that use of the property. This is compensation for wear, deterioration or obsolescence of the property. You can write off most types of tangible property (except land), such as buildings, machinery, vehicles, furniture and equipment. You can also depreciate certain intangible property such as patents, copyrights, and software. To be depreciable, the property must be owned by you, should be used in the management of your business or income producing activity. You must have a determinable useful life and that is expected to last more than a year.
Depreciation is calculated in two ways: in a straight line and accelerated depreciation.
Straight line method is the simplest and most common depreciation method used. Under this method the basis of the assets is depreciated evenly over its useful life. An equal amount of depreciation expense is recorded in each period. The annual depreciation is calculated by subtracting the residual value of the assets of the purchase price, then divide this number by the estimated useful life of the asset.
Under the straight-line method of depreciation for a common method is the method of production units of depreciation. This method of depreciation ties of the depreciation rate of capacity of the asset's useful life to do the job. These units can be measured in a number of ways, thousands of cars or truck and the used for machinery and other equipment. This method has nothing to do with the assets of age but less than the asset is used more than depreciates.
Accelerated depreciation refers to any one of several methods by which a company, for financial accounting and / or fiscal depreciating asset fixed so that the amount of depreciation each is greatest during the first years of an active life. This is the method is quite complicated for business owners should have a better understanding of the method to help save on taxes. This method allows more rapid depreciation of the straight line depreciation method line. It will provide greater tax shield effect of straight-line depreciation, so companies with large tax burden that would like to use depreciation methods accelerated, even if you reduce the revenue appearing in the financial statements. Accelerated depreciation methods are popular for equipment depreciation could be replaced before the end of its useful life since the equipment may be obsolete (eg computers).
An example of an accelerated depreciation method is the accelerated cost and modified recovery system (MACRS). This is the current method of accelerated depreciation that the IRS requires companies to use. In this classification method asset determines the repayment period. Modified Accelerated Cost Recovery System is the ACER time.
Acceleration of recovery before cost of the system (ACRS) most capital purchases are depreciated straight line. ACER was in force between 1975-1983 in the United States under the Tax Law Economic Recovery in 1986. This method is unique because it established class lives of property, the calculations are based on an estimated salvage value of zero, and shorter recovery periods were used to calculate annual depreciation. This resulted in a rapid depreciation of capital expenditures compared to the straight-line method of depreciation.
Residual value is the estimated value of an asset at the end of its useful life. This is also known as the residual value or scrap value. It is the net cash flow that occurs when the asset is liquid at the end of his life.
MACRS ACRS replaced in 1986 with the passage of Tax Reform Act of 1986. It is similar to the sidewalk, except that the number of property classes was expanded and half year convention was added to simplify the first and final year of Property recovery of life.
Other types of accelerated depreciation are "Sum of the digits of years" and "double-declining balance. "Here is (briefly) how each work.
Double declining balance, the asset is depreciated twice as fast as the crow flies. This method of depreciation included higher depreciation charges and higher tax benefits in the early years of an active life. The declining-balance method may be appropriate in industries where equipment and technology changes rapidly
Sum of years digits, assets depreciate faster that straight line, but not as fast as declining balance. This is a depreciation method in which the amounts recognized in the early stages of life an asset are greater than those recognized in subsequent periods. The SYD is in the estimated useful life of an asset in years, the allocation of consecutive numbers for each year, a total of these numbers.
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