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
iDepreciation 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)
iDepreciation is recognized as an expense in
the period, reducing taxable income and
income tax
iDepreciation is not a cash flow
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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
iStraight line
iDeclining balance
iDouble declining balance
iSum of the years’ digits
iUnit depreciation
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Straight line depreciation (SLD)
Firm A
Depreciation rate 20%
Year 1 2 3 4 5
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 50%
Year 1 2 3 4 5
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
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Double declining balance (DDB)
Firm C
DDB rate 40%
Year 1 2 3 4 5
Beginning net value 5000 3000 1800 1080 540
Depreciation during period 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
Year 1 2 3 4 5
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
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Unit depreciation
Firm E
Year 1 2 3 4 5
Beginning net value 5000 4250 3250 1750 750
Depreciation rate 15% 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 0
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Comparison
(example: at the end of year 2)
FIRM A B C D E
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
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