What♔ Is the Half-Year Convention for Depreciation?

The half-year convention for depreciation is the depreciation schedule that treats all property acquired during the year as being acquired exactly in the middle ꦍof the year. This means that only half of the full-year depreciation is allowed in the first year, while the remaining balance is deducted in the final year of the depreciation schedule, or the year that the property is sold.

The hal🌊f-ye𓆏ar convention for depreciation can be applied to all forms of depreciation methods.

Understanding🉐 the Half-Year Convention for Depreciation

As one of many U.S. ✅澳洲幸运5官方开奖结果体彩网:generally accepted accounting 💞principles (GAAP), the matching principle seeks to match expenses to the period in which the related revenues were earned. Depreciation is an accounting convention that helps match expenses incurred by a 澳洲幸运5官方开奖结果体彩网:fixed asset and the related revenues generated by that asset over its 澳洲幸运5官方开奖结果体彩网:useful life.

An item is recorded on a company’s books as a fixed asset at the time of purchase if it exceeds a capitalization threshold set by the company and will bring value to the company over a number of years. Rather than taking the full expense in the year of purchase, depreciation allows a company to expense a portion of the cost of an asset in each of the years of the asset’s useful life. The company will then keep track of the 澳洲幸运5官方开奖结果体彩网:book value of the asset by subtracting the 澳洲幸运5官方开奖结果体彩网:accumulated depreciation from the asset’s 澳洲幸运5官方开奖结果体彩网:historical cost.

The half-year convention 🌄for depreciation allows companies to better match revenues and expenses in the year that they are incurred by depreciating only half of the typical annual depreciation expense in year one if the asset is purchased in the middle of the year. This applies to all f🧔orms of depreciation, including straight-line, double declining balance, and sum-of-the-years’-digits.

There is also a mid-quarter convention that must be used instead of the half-year convention, if at least 40% of the 澳洲幸运5官方开奖结果体彩网:cost basis of all fixed assets acquired in a year we🍌re put in service sometime🍎 during the last three months of the year.

Example of the Half-Year Convention

As an example, assume a company purchases a $105,000 delivery truck with a salvage value of $5,000 and an expected🎃 life of 10 years. The straight-line method of depreciation expense is calculated by dividing the difference between the cost of the truck and the salvage value by the expected life of the truck.

In t♋his example, the calculation is $105,000 minus $5,000 divided by 10 years, or $10,000 per🔴 year. Ordinarily, the company would expense $10,000 in years one through 10.

If the company purchases the truck in July rather than January, however, it is more accurate to use the half-year convention to better align the cost of the equipment with the time period in which the truck provides value. Instead of depreciating the full $10,000 in year one, the half-year convention expenses half of the calculated depreciation expense, or $5,000 in year one. In years two through 10, the company expenses $10,000, and then in year 11, the company expenses the final $5,000. The half-year convention extends the number of years that the asset is depreciated, but the extension provides a more accurate matching of expenses to revenues.

The Bottom Line

The half-year convention for depreciation holds that assets purchased during the year will be treated as if they were purchased in the middle of the year for the purposes of depreciation. Sometimes the mid-quarter convention will have to be used instead. These conventions allow a company to better match revenues and expenses in the year in which they are incurred.