Financial Terms
Depreciation Allowances

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Definition of Depreciation Allowances

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Depreciation Allowances

Tax deductions that businesses can claim when they spend money on investment goods.

Related Terms:

Accelerated depreciation

Any depreciation method that produces larger deductions for depreciation in the
early years of a project's life. Accelerated cost recovery system (ACRS), which is a depreciation schedule
allowed for tax purposes, is one such example.


A non-cash expense that provides a source of free cash flow. Amount allocated during the
period to amortize the cost of acquiring Long term assets over the useful life of the assets.

Depreciation tax shield

The value of the tax write-off on depreciation of plant and equipment.

Double-declining-balance depreciation

Method of accelerated depreciation.

Straight line depreciation

An equal dollar amount of depreciation in each accounting period.

Sum-of-the-years'-digits depreciation

Method of accelerated depreciation.


A technique by which a company recovers the high cost of its plant-and-equipment assets gradually during the number of years they’ll be used in the business. depreciation can be physical, technological, or both.

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A depreciation method that depreciates an asset the same amount for each year of its estimated


An expense that spreads the cost of an asset over its useful life.

Earnings before interest, taxes, depreciation and amortization (EBITDA)

The operating profit before deducting interest, tax, depreciation and amortization.

Accumulated depreciation

A contra-fixed asset account representing the portion of the cost of a fixed asset that has been previously charged to expense. Each fixed asset account will have its own associated accumulated depreciation account.

Depreciation expense

An expense account that represents the portion of the cost of an asset that is being charged to expense during the current period.

accelerated depreciation

(1) The estimated useful life of the fixed asset being depreciated is
shorter than a realistic forecast of its probable actual service life;
(2) more of the total cost of the fixed asset is allocated to the first
half of its useful life than to the second half (i.e., there is a
front-end loading of depreciation expense).

accumulated depreciation

A contra, or offset, account that is coupled
with the property, plant, and equipment asset account in which the original
costs of the long-term operating assets of a business are recorded.
The accumulated depreciation contra account accumulates the amount of
depreciation expense that is recorded period by period. So the balance in
this account is the cumulative amount of depreciation that has been
recorded since the assets were acquired. The balance in the accumulated
depreciation account is deducted from the original cost of the assets
recorded in the property, plant, and equipment asset account. The
remainder, called the book value of the assets, is the amount included on
the asset side of a business.


Refers to the generally accepted accounting principle of allocating
the cost of a long-term operating asset over the estimated useful
life of the asset. Each year of use is allocated a part of the original cost of
the asset. Generally speaking, either the accelerated method or the
straight-line method of depreciation is used. (There are other methods,
but they are relatively rare.) Useful life estimates are heavily influenced
by the schedules allowed in the federal income tax law. depreciation is
not a cash outlay in the period in which the expense is recorded—just
the opposite. The cash inflow from sales revenue during the period
includes an amount to reimburse the business for the use of its fixed
assets. In this respect, depreciation is a source of cash. So depreciation is
added back to net income in the statement of cash flows to arrive at cash
flow from operating activities.

straight-line depreciation

This depreciation method allocates a uniform
amount of the cost of long-lived operating assets (fixed assets) to each
year of use. It is the basic alternative to the accelerated depreciation
method. When using the straight-line method, a business may estimate a
longer life for a fixed asset than when using the accelerated method
(though not necessarily in every case). Both methods are allowed for
income tax and under generally accepted accounting principles (GAAP).

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tax benefit (of depreciation)

the amount of depreciation deductible for tax purposes multiplied by the tax rate;
the reduction in taxes caused by the deductibility of depreciation

tax shield (of depreciation)

the amount of depreciation deductible
for tax purposes; the amount of revenue shielded
from taxes because of the depreciation deduction


Reduction in value of fixed or tangible assets over some period
for accounting purposes. See Amortization.

Accelerated depreciation

Any of several methods that recognize an increased amount
of depreciation in the earliest years of asset usage. This results in increased tax benefits
in the first few years of asset usage.

Accumulated depreciation

The sum total of all deprecation expense recognized to date
on a depreciable fixed asset.


Both the decline in value of an asset over time, as well as the gradual
expensing of an asset over time, roughly in accordance with its level of usage or
decline in value through that period.

depreciation tax shield

Reduction in taxes attributable to the depreciation allowance.

straight-line depreciation

Constant depreciation for each year of the asset’s accounting life.


a) Of capital stock: decline in the value of capital due to its wearing out or becoming obsolete.
b) Of currency: decline in the exchange rate.


The systematic and rational allocation of the cost of property, plant, and equipment
over their useful lives. Refer also to amortization and depletion.

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

An earningsbased measure that, for many, serves as a surrogate for cash flow. Actually consists of working
capital provided by operations before interest and taxes.

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EBDDT - Earnings before depreciation and deferred taxes

This measure is used principally by
firms in the real estate industry, with the exception of real estate investment trusts, which typically
do not pay taxes.


Amortization of fixed assets, such as plant and equipment, so as to allocate the cost over their depreciable life.







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