depreciation. depreciation is the decrease in value of physical properties with the passage of time....
TRANSCRIPT
Depreciation
Depreciation is the decrease in value of physical properties with the passage of
time.
• It is an accounting concept, a non-cash cost, that establishes an annual deduction against before-tax income.
• It is intended to approximate the yearly fraction of an asset’s value used in the production of income.
• Applied only to Fixed Asset
FIXED ASSET
• What are fixed asset:
Used in business to produce income for more than 12 months
Fixed Asset Vs Inventory
Car dealers (Vimal) Vs Celcom car
INVENTORY FIXED ASSET
Property is depreciable if• it is used in business or held to produce
income.• it has a determinable useful life, longer than
one year.• it is something that wears out, decays, gets
used up, becomes obsolete, or loses value from natural causes.
• it is not inventory, stock in trade, or investment property.
• One exception to depreciation is land
Definition2011 2012 2013 2014
Revenue (mill) 1 1 1 1
Cost of good sold
Variable (thousand)
-100 -100 -100 -100
Factory Retooling (Fixed Cost) (thousand)
-500 -500
Gross Profit 400 900 400 900
SG & A (Selling General & Administration
-500 -500 -500 -500
Operating Profit -100 400 -100 400
• Not a good way of accounting• Lumpiness of the statement• Create impression of vulnerable business on
very stabile business• Spreading throughout the years - depreciation
Definition2011 2012 2013 2014
Revenue (mill) 1 1 1 1
Cost of good sold
Variable (thousand)
-100 -100 -100 -100
Factory Retooling (Fixed Cost) (thousand)
-250 -250 -250 -250
Gross Profit 650 650 650 650
SG & A (Selling General & Administration
-500 -500 -500 -500
Operating Profit 150 150 150 150
Definition2011 2012 2013 2014
Revenue (mill) 1 1 1 1Cost of good soldVariable (thousand)
-100 -100 -100 -100
Factory Retooling (Fixed Cost) (thousand)
-250 -250 -250 -250
Gross Profit 650 650 650 650SG & A (Selling General & Administration
-500 -500 -500 -500
Operating Profit 150 150 150 150
Depreciation
DEPRECIATION METHODS
• Straight line depreciation methods• Declining balance depreciation methods• Double declining method• Sum-of-the-year depreciation method• Unit-of-production depreciation method
DEPRECIATION METHODS
• Straight line depreciation methods• Declining balance depreciation methods• Double declining method (DDB)• Sum-of-the-year depreciation method• Unit-of-production depreciation method
IMPORTANT TERMS
• Book Value – It is the original cost of property, including any adjustments with depreciation deductions. Represent the amount of capital that remains invested in the property
• Market Value - The amount that will be paid by a willing buyer to a willing seller for a property.
DEPRECIATION METHODS
Example that we will be used throughout the class:Purchase cost : $304,000Service life : 8 yearsEst. Salvage Value : $16,000
Straight Line MethodsPurchase cost : $304,000Service life : 8 yearsEst. Salvage Value : $16,000
Formula : (Cost-Selvage value)/est. service life =Depreciation charge
: (304,000 – 16,000)/8 = 36,000/yr
Straight Line MethodsDepreciation schedule
Yr Depreciation Charge
Cumulative depreciation
BV end year
304,000
1 36,000 36,000 268,000
2 36,000 72,000 232,000
3 36,000 108,000 196,000
4 36,000 144,000 160,000
5 36,000 180,000 124,000
6 36,000 216,000 88,000
7 36,000 252,000 52,000
8 36,000 288,000 16,000
Declining Balance Methods (DB)Depreciation schedule
Yr BV Beg. Years
Rate, DB Deprec. Charge
Cum. Deprec.
BV end year
1 304,000 25% 76,000 76,000 228,000
2 228,000 25% 57,000 133,000 171,000
3 171,000 25% 42,750 175,750 128,250
4 128,250 25% 32,063 207,813 96,188
5 96,188 25% 24,047 231,859 72,141
6 72,141 25% 18,035 249,895 54,105
7 54,105 25% 13,526 263,412 40,579
8 40,579 25% 10,145 273,566 30,434
Declining Balance Methods (DB)How to determine the rate?DB methods also known as double declining rate;declining rate (%) is the rate from straight line method, and in our example is 1/81/8 = 12.5Double declining rate is 2 times of declining rate:= 2 x 12.5% = 25%
Double Declining Methods (DDB)Formula:
Depreciation charge for yr 1 = BV at the start of year 1 X double declining rate (DD)BV at the start of yr 1 = Original cost – AD at the start of year 1Double declining rate = 100%/useful life x2Depr charge for yr 1 = BV year 1 x DDDepr charge for yr 2 = BV year 2 x DD