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Methods of Depreciation of Assets
Depreciation is the method used by companies to allocate the cost of a fixed asset over the useful life of that asset. On the Balance Sheet, the book value of fixed assets is listed net of something called Accumulated Depreciation. The only alternative to depreciation of an asset is to expense the acquisition cost in the year in which the asset is acquired. The benefit of depreciation involves the allocation of cost of acquisition to subsequent operating periods.
American companies often use accelerated depreciation, a mechanism that allows them to recognize higher amounts of depreciation in the earlier years and lower amounts in later years. By definition, accelerated depreciation is any method of depreciation of an asset faster than the straight line method of depreciation. American companies can use the Modified Accelerated Cost Recovery System's rules to determine how quickly an asset can be depreciated. The intent of an accelerated depreciation schedule is for companies to realize the benefits of their decision to purchase assets more quickly, recalling that depreciation reduces taxable income but is a non-cash expense.
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