Business Glossary

amortization of fixed assets, such as plant and equipment, in order to allocate the cost over its depreciable life. It is a process of cost allocation and not valuation. depreciation reduces taxable income but does not reduce cash. Depreciation is recorded by debiting depreciation expense and crediting accumulated depreciation. There are several methods of computing depreciation; straight-line depreciation , units of production method , and accelerated depreciation methods (e.g., sum-of-the-years'-digits (SYD) method and double declining balance method . Depreciation expense is deducted by a business on its federal income taxreturn. The depreciation amount on the tax return, however, may differfrom the amount reported in the firm's income statement. In fact, the method used on the tax return need not be the same method used in the inancial statements. Typically, a firm uses an accelerated depreciation for tax purposes and the straight-line method in its financial statements. accelerated cost recovery system (ACRS) is a system that allows a specific accelerated write-off pattern of the asset for tax purposes.