Averaging Conventions

To avoid the complications of depreciating each asset from the specific date on which you placed it in service, GAAP supports guidelines that assume you place assets in service or dispose of them at designated dates throughout the year. These guidelines are called averaging conventions. By assuming an average placed-in-service date, the amount of total depreciation allowed for all assets approximates the total depreciation that would be calculated based on the actual days in service.

Under GAAP rules, different depreciation methods use specific averaging conventions. See depreciation methods to learn which averaging convention it uses.

An averaging convention may be applied differently depending on the type of accounting cycle you have selected. The application allows you to use either a monthly accounting cycle or a 52/53-week accounting cycle. A monthly accounting cycle applies the averaging conventions based on months, and a 52/53-week accounting cycle applies the averaging conventions based on weeks. For more information, see Setting Up a New Organization with a 52/53-Week Accounting Cycle.

For example, an asset placed in service in a monthly accounting cycle is allowed 1/12 of the full annual amount for each month it is in service. If you were using a 52/53-week accounting cycle, this same asset would be allowed either 4/52 or 5/52 of the full annual amount for each period it is in service.

There are four averaging conventions:

• Half-Year Convention
• Modified Half-Year Convention
• Midmonth Convention
• Full-Month Convention