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02/10/2003 TanBinh 1
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
02/10/2003 TanBinh 2
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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02/10/2003 TanBinh 3
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 12345
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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02/10/2003 TanBinh 5
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
02/10/2003 TanBinh 6
Double declining balance (DDB)
Firm C
DDB rate
40%
Year 12345
Beginning net value 5000 3000 1800 1080 540
Depreciation during perio
d
2000 1200 720 540 540
Accumulated depreciation 2000 3200 3920 4460 5000
Ending net value 3000 1800 1080 540 0
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02/10/2003 TanBinh 7
Sum of the years’ digits (SYD)
Firm D
Sum of the years' digits 15
Year 12345
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
02/10/2003 TanBinh 8
Unit depreciation
Firm E
Year 12345
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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02/10/2003 TanBinh 9
Comparison
(example: at the end of year 2)
ABC D E
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
FIRM
Depreciation method
. flow
02/10/2003 TanBinh 2
Depreciation
Depreciation is a general term, but
sometimes different terms are used for
different types of fixed assets:
- Depreciation . TanBinh 4
Straight line depreciation (SLD)
Firm A
Depreciation rate
20%
Year 12345
Beginning net value 5000 4000 3000 2000 1000
Depreciation during period