Half-year convention and mid-month convention are two methods used in accounting to calculate depreciation of assets.
The half-year convention assumes that an asset is placed in service at the midpoint of the year, regardless of when it was actually purchased or put to use. Under this method, depreciation is calculated as if the asset was in use for half a year in the year of acquisition, and a full year for every subsequent year of its useful life. This means that the depreciation expense for the first year will be half of what it would be under the straight-line method, and then it will be calculated as normal for the remaining years.
For example, let’s say a company purchased a machine on July 1st, 2022 for $50,000 and it has a useful life of 5 years. Using the half-year convention, the depreciation expense for the first year (2022) would be $4,167 (($50,000/5) x 0.5), and for each subsequent year it would be $10,000 ($50,000/5).
The mid-month convention is a similar method that assumes that an asset is placed in service on the 15th day of the month, regardless of the actual date it was put to use. Under this method, the first month of service is considered to be a full month, regardless of how many days the asset was actually used in that month. Depreciation is then calculated normally for each subsequent month.
For example, let’s say a company purchased a computer on January 20th, 2023 for $2,000 and it has a useful life of 3 years. Using the mid-month convention, the depreciation expense for the first year (2023) would be $363 (($2,000/3) x 11/12), and for each subsequent year it would be $667 ($2,000/3).
Using Half-year or Mid-month conventions simplifies the calculations for depreciation by removing the necessity of tracking the exact number of days an asset is in service in the first month or year. For more in-depth explanation and examples, go to these articles: Mid-month convention and Half-year convention.