Accelerated Cost Recovery System (ACRS) - Explained
What is the Accelerated Cost Recovery System?
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Table of ContentsWhat is Accelerated Cost Recovery System?How is the Accelerated Cost Recovery System Used?
What is Accelerated Cost Recovery System?
Accelerated Cost Recovery System, or ACRS, is an accounting method for depreciating assets When using ACRS, a company assigns each asset an expected class life. The class life is the period over which a company will depreciate a particular asset. During each assets class life, the company depreciates the cost of the asset by a specific percentage annually. Usually, the curved depreciation rate is higher in the first few years of the life class and reduces over time. ACRS curved depreciation is what makes it different from traditional, flat-rate depreciation methods that amortize asset costs at the same rate, year over year.
How is the Accelerated Cost Recovery System Used?
The Tax Reform Act of 1986 made it mandatory that companies calculate asset depreciation in their accounting systems. Prior to the advent of ACRS, businesses assets were depreciate using a simple linear depreciation system. Many companies favor the ACRS method of depreciation because it more accurately reflects actual asset depreciation. The ACRS system is flexible. Companies don't have to maintain the same depreciation rate across all of their assets. The method permits companies to divide their various properties into asset classes. Each asset class can be depreciated differently, giving businesses more flexibility with cost write-offs. Companies that practice this type of accounting system maintain tables of each property class that include a description of the property class, year of amortization, any other relevant information for accountants referencing the material. Heres a step by step walkthrough of depreciating an asset under an ACRS accounting system. First, business accountants classify property as a particular asset class. Next, the accountant references the asset class depreciation tables mentioned in the previous paragraph. There, the accountant will find the appropriate depreciation rate and apply it to the property in question. The amount depreciated will be balanced against the company's other income tax categories. Accountants often refer to accelerated cost recovery systems as loaded amortization systems, because the rate of depreciation is weighted towards the front of the class life. ACRS is favored by most businesses because of the tax flexibility the system offers. A loaded amortization method allows businesses to more accurately document the real-life depreciation of different asset classes.