Depreciation ® Depreciation is the allocation of the acquisition cost of a fixed asset to different business periods based on the accrual basis, the going-concern concept, and the matc
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Depreciation
® Depreciation is the allocation of the
acquisition cost of a fixed asset to different business periods (based on the accrual basis, the going-concern concept, and the matching concept)
® Depreciation is recognized as an expense in
the period, reducing taxable income and
income tax
® Depreciation is not a cash flow
02/10/2003 TanBinh
Depreciation
Depreciation is a general term, but sometimes different terms are used for different types of fixed assets:
- “Depreciation” is used for tangible fixed assets
- “Amortization” is used for intangible fixed assets
- “Depletion” is used for fixed assets such as natural resources
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Depreciation methods
© Straight line
° Declining balance
® Double declining balance
°* Sum of the years’ digits
®* Unit depreciation
straight line depreciation (SLD)
Firm A
Depreciation rate 20%
Beginning net value 5000 4000 3000 2000 1000 Depreciation during period 1000 1000 1000 1000 1000 Accumulated depreciation 1000 2000 3000 4000 5000 Ending net value 4000 3000 2000 1000 0
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Declining balance (DB)
at a rate of 50%
Firm B
Depreciation rate SO%
Beginning net value 5000 2500 1250 625 312.5 Depreciation during period 2500 1250 625 312.5 312.5 Accumulated depreciation 2500 3750 4375 4687.5 5000 Ending net value 2500 1250 625 312.5 0
Double declining balance (DDB)
Firm Cc
DDB rate 40%
Beginning net value 5000 3000 1800 1080 540 Depreciation during perioc 2000 1200 720 540 540 Accumulated depreciation 2000 3200 3920 4460 5000 Ending net value 3000 1800 1080 540 0
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sum of the years’ digits (SYD)
Firm D
Sum of the years’ digits 15
Beginning net value 5000 3333 2000 1000 333
Depreciation during period 1667 1333 1000 667 333
Accumulated depreciation 1667 3000 4000 4667 5000
Ending net value 3333 2000 1000 333 0
Unit depreciation
Firm E
Beginning net value 5000 4250 3250 1/50 750 Depreciation rate I5% = 20% 30% 20% 15% Annual depreciation 750 1000 1500 1000 750 Accumulated depreciation 750 1750 3250 4250 5000 Ending net value 4250 3250 1750 750 O
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Comparison
(example: at the end of year 2)
Depreciation method SLD DB DDB SYD Unit
Acquisition cost of fixed asset 5000 5000 5000 5000 5000 End-of-year-2 acc depreciation 2000 3750 3200 3000 1750 End-of-year-2 remaining value 3000 1250 1800 2000 3250 Depreciation expense for year 2 1000 1250 1200 1333 1000
02/10/2003 TanBinh