Depreciation_Methods

Michael Orfanelli Research Paper Accounting December 2, 2008 Use of Accelerated Depreciation Methods Allows Shifting of Income How to begin a conclusion on a project I don’t completely understand. I have done my hunting on the computer, local libraries, even my boss’s son who is an accountant. I have tried to understand the meaning behind the question being asked, but all the information comes up as formulas to use in each depreciation method, Once I meet up with my bosses son and explained in more detail the tax law. He showed me the two mainly used methods being the declining balance and the sum of the year’s digits. So I sat back and tried to figure out how these methods could work for me as a chef in my own restaurant. Here is an example of what opinions and conclusions I came up with, Example: A restaurant buys a stove at the cost of five thousand dollars. It’s expected to last ten years. Under simple straight depreciation, the restaurant allocates five hundred dollars of the cost of the stove to the expenses every year until the five thousand dollars capital expense has been depreciated. Let’s say the restaurant makes a profit of a thousand dollars a year and pays twenty percent tax. Normal depreciation as the restaurant claims five hundred dollars in depreciation every year therefore having a tax profit of five hundred dollars at a rate twenty percent or a hundred dollars and a thousand dollars total for ten years. As for accelerated depreciation it allows the restaurant to depreciate the stove at a much faster rate. Instead of ten years at five hundred dollars a year, it depreciated at a rate of a thousand dollars a year for five years and nothing for the last five years. For the first five years the restaurant has no taxable profit and pays no tax. For the last five years the company has a profit of a thousand dollars and twenty percent tax will pay two hundred a year or a thousand dollars total. The comparison in both cases is that the restaurant pays the same total amount of taxes over ten years, but the accelerated depreciation example the taxes have been deferred to a much later date. So in my conclusion the advantage of this especially to a new restaurant is that it gives the new establishment a chance to build business and be successful while deferring taxes. Also deferring taxes is a good thing, its like the principle of time and the value of money. Better to have the money in hand today then at a later date. Hopefully I have successfully addressed the question for this research paper. I have tried to understand the accounting information throughout this class, but I am a chef that understands how to make money through the product brought in. I am glad that I had a chance to learn some valuable information so that I can successfully own and run a restaurant some day. Work Cited 1. Andrew, Abel. (1983) Accelerated Depreciation and the Efficacy of Temporary Fiscal Policy: Implications For an Inflationary Economy. National Bureau of Economic Research, Inc/NBER Working Papers 2. Stansberry, Gary. “ The Do’s and Don’ts of depreciation.” Rental Equipment Register 1 June 2004. 28 Feb 2005