Mid-month convention definition
/What is the Mid-Month Convention?
The mid-month convention states that all fixed asset acquisitions are assumed to have been purchased in the middle of the month for depreciation purposes. Thus, if a fixed asset was acquired on January 5th, the convention states that you bought it on January 15th; or, if you bought it on January 28, still assume that you bought it on January 15th. Doing so makes it easier to calculate a standard half-month of depreciation for that first month of ownership.
When using the mid-month convention, you should record a half-month of depreciation for the last month of the asset's useful life. By doing so, the two-half month depreciation calculations equal one full month of depreciation.
Related AccountingTools Courses
Example of the Mid-Month Convention
Failsafe Containment acquires a new warehouse for its nuclear reactor containment vessel production facility on January 27. The price paid for the warehouse is $4 million. As mandated by the IRS, Failsafe’s controller sets the useful life of the facility at 39 years. Using the straight-line depreciation method, this results in an annual depreciation charge of $102,564.10. However, the accountant must adjust this calculation for the mid-month convention, which stipulates that the initial month’s depreciation charge only include a half-month of depreciation, or $4,273.50. This means that the first and last months of depreciation should be for $4,273.50, while the depreciation charge for all other months should be $8,547.00.
Problems with the Mid-Month Convention
There are several issues with the mid-month convention, which are as follows:
Delays depreciation recognition. Many companies prefer to use full-month depreciation in the first month of ownership, irrespective of the actual date of purchase within the month, so that they can slightly accelerate their recognition of depreciation; doing so reduces their taxable income.
Extra complexity. The mid-month convention introduces some complexity to the calculation of depreciation, making it more likely that a calculation error will occur.
For these reasons, the mid-month convention is not frequently used.