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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 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 1 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 02/10/2003 TanBinh 2 1 Depreciation methods iStraight line iDeclining balance iDouble declining balance iSum of the years’ digits iUnit depreciation 02/10/2003 TanBinh 3 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 02/10/2003 TanBinh 4 2 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 5 Double declining balance (DDB) Firm C DDB rate 40% Year 12345 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 02/10/2003 TanBinh 6 3 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 7 Unit depreciation Firm E Year 12345 Beginning net value 5000 4250 .