1. Depreciation

2. 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

3. FIXED ASSET What are fixed asset:
Used in business to produce income for more than 12 months

4. Fixed Asset Vs Inventory
Car dealers (Vimal) Vs Celcom car
INVENTORY
FIXED ASSET

5. 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

6. Definition 2011 2012 2013 2014 Revenue (mill) 1 Cost of good sold
Variable (thousand)
-100
Factory Retooling (Fixed Cost) (thousand)
-500
Gross Profit
400
900
SG & A (Selling General & Administration
Operating Profit

7. Not a good way of accounting
Lumpiness of the statement
Create impression of vulnerable business on very stabile business
Spreading throughout the years - depreciation

8. Definition 2011 2012 2013 2014 Revenue (mill) 1 Cost of good sold
Variable (thousand)
-100
Factory Retooling (Fixed Cost) (thousand)
-250
Gross Profit
650
SG & A (Selling General & Administration
-500
Operating Profit
150

9. Definition Depreciation 2011 2012 2013 2014 Revenue (mill) 1
Cost of good sold
Variable (thousand)
-100
Factory Retooling (Fixed Cost) (thousand)
-250
Gross Profit
650
SG & A (Selling General & Administration
-500
Operating Profit
150
Depreciation

10. DEPRECIATION METHODS Straight line depreciation methods
Declining balance depreciation methods
Double declining method
Sum-of-the-year depreciation method
Unit-of-production depreciation method

11. 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

12. 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.

13. DEPRECIATION METHODS
Example that we will be used throughout the class: Purchase cost : $304,000 Service life : 8 years Est. Salvage Value : $16,000

14. Straight Line Methods
Purchase cost : $304,000 Service life : 8 years Est. Salvage Value : $16,000
Formula : (Cost-Selvage value)/est. service life =Depreciation charge
: (304,000 – 16,000)/8 = 36,000/yr

15. Straight Line Methods Depreciation schedule Yr Depreciation Charge
Cumulative depreciation
BV end year
304,000 1
36,000
268,000 2
72,000
232,000 3
108,000
196,000 4
144,000
160,000 5
180,000
124,000 6
216,000
88,000 7
252,000
52,000 8
288,000
16,000

16. 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
228,000 2
57,000
133,000
171,000 3
42,750
175,750
128,250 4
32,063
207,813
96,188 5
24,047
231,859
72,141 6
18,035
249,895
54,105 7
13,526
263,412
40,579 8
10,145
273,566
30,434

17. 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 1/8
1/8 = 12.5
Double declining rate is 2 times of declining rate:
= 2 x 12.5% = 25%

18. 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 1
Double declining rate = 100%/useful life x2
Depr charge for yr 1 = BV year 1 x DD
Depr charge for yr 2 = BV year 2 x DD