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Simple English definitions for legal terms
annuity depreciation method
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A quick definition of annuity depreciation method:
The annuity depreciation method is a formula used to estimate how much an asset will wear out or become obsolete over its useful life. This method helps calculate the amount of tax deduction for depreciation each year. It allows for a return of imputed interest on the undepreciated balance of an asset's value, which is subtracted from the current depreciation amount before it is credited to the accumulated depreciation accounts. Other depreciation methods include the straight-line method, declining-balance method, and units-of-output method.
A more thorough explanation:
The annuity depreciation method is a formula used to estimate the wear, use, or obsolescence of an asset over its useful life. This method is helpful in calculating the annual tax deduction for depreciation.
For example, let's say a company purchases a machine for $10,000 with a useful life of 5 years and no salvage value. Using the annuity depreciation method, the company can deduct $2,000 ($10,000/5) each year for 5 years.
The annuity depreciation method allows for a return of imputed interest on the undepreciated balance of an asset's value. The imputed interest is subtracted from the current depreciation amount before it is credited to the accumulated depreciation accounts.
Overall, the annuity depreciation method is a useful tool for businesses to accurately calculate their annual tax deductions for depreciation.