The accountants use depreciation to match the expenses of the company with the revenue while spreading the cost of the assets over the asset life. There are numerous accounting methods being used in the world today; some companies use a method to manipulate its net income while others may use it to stimulate the economic conditions. But since the main objective is matching of the expenses with the revenues, the best method is the accelerated method of depreciation. This is especially helpful in the case when a machine is more productive in the initial years and its performance would be reduced later on. The accelerated depreciation method allows the company to deduct a large proportion in a shorter period of depreciation as more depreciation value can be claimed in the early years of the cycle (Sachs and Russell et al.). By using this method, the overall cost of the machinery or the asset can be reduced significantly. It results in tax savings and also allows the business to defer a large portion of the tax debt. When the deductions are taken in early years of the asset’s life cycle, the overall tax debt of the company shall be reduced and so the company shall have more liquid cash to invest in other significant functions. With more money available in the initial years, the company gets a chance to penetrate and expand successfully in the market. So, overall this method is more popular than other methods of depreciation because it provides a greater effect of tax shield to the company (Urbanik and Thomas). As the owner shall take greater advantage of the tax deductions in the initial years, it earns a tax shield for the company that is a good sign in the short run.
Works cited
Sachs, Harvey M, Christopher Russell, Ethan A Rogers and Steven Nadel. "Depreciation: Impacts of Tax Policy." (2012): Print.
Urbanik, Vicki and James Thomas. "Depreciation: Application in Financial Accounting, Income Tax, and Property Tax." Business Journal for Entrepreneurs, 2012. 4 (2012): Print.
