Economics Tutorial Help

e-Assignmenthelp

Topic: Understanding Deficit and Depreciation

Problem Statement:1. Write short notes on deficit and depreciation.2. Explore the relation between them in the

context of a growing economy.3. List out the methods used to quantitatively

measure deficit and depreciation. What are the different kinds of deficit?

© e-Assignmenthelp, 2014

Types of Deficit: Revenue DeficitRevenue Deficits = Revenue Expenditure – Revenue Receipts

Revenue Expenditures: Interest Payments Non-Interest Payments

Subsidies; Relief; Pensions; Social services; Non-plan revenue grants to states and UTs;

Grants to foreign governments; Defense expenditure on revenue account; Other general services

Revenue Receipts:Tax RevenueNon-Tax Revenue

Interest receipts; Dividends; Profits; Grants

Types of Deficit: Capital Deficit Deficit on Capital Account =

Capital Expenditure – Capital Receipts

Capital ExpenditurePlan Capital Expenditure

Central plan; Central assistance to plan of states and the UTs

Non-Plan Capital ExpenditureDefense expenditure and other non-plan

outlay on capital account; Loans to public sector enterprises, states and UTs, foreign governments and others

Capital ReceiptsRecoveries; Borrowings; Other capital

receipts (e.g., sale of government assets)

Types of Deficit: At a glance Budget Deficit = Revenue Deficit+ Deficit on Capital Account

= Total Expenditure – Total Receipts

Gross Fiscal Deficit = Total Expenditure – (Revenue Receipts + Recoveries +

Sale of Public Assets)

Net Fiscal Deficit = Gross Fiscal Deficit – (Loans and Advances –

Recoveries of Loans)

Gross Primary Deficit = Gross Fiscal Deficit – Interest Payment

Net Primary Deficit= Net Fiscal Deficit – Net Interest

Payments

What is depreciation ?

• Depreciation is a decrease in the value of a fixed (capital) asset (a piece of equipment, a building, a vehicle, etc.) over the time that the asset is being used.

• Events that can cause assets to depreciate include wear and tear, usage, age, deterioration, obsolescence (change in technology) and accidents.

What is depreciation? (Contd.)• Measuring the loss in value of an asset is known as

depreciation.• The International Accounting Committee defines

depreciation as follows: Depreciation is the allocation of the depreciable amount of an asset over its estimated useful life. Useful life is the period over which a depreciable asset is expected to be used by the enterprise.

What Can Depreciate?• Vehicles • Office furniture• Office equipment• Buildings you own• Machinery you use to manufacture products

What Can’t Depreciate:• Land, Inventory

Depreciation Methods:

Four basic methods exist for computing depreciation:

• Straight-line• Units of production• Double Declining balance• Sum-of-the-years digits.

Straight-line Method

• The initial cost of the asset • Residual value ( if any) • Estimated useful life. Straight line depreciation per year = (Cost –

Residual Value)/ Useful life in years. * Equal amounts of depreciation

Units of production Method

• A fixed amount of depreciation is assigned to each unit of output produced by plant asset.

Units-of-production depreciation (UOP) per unit of output = ( Cost - Residual Value)/ Useful life in units.

Double Declining balance-accelerated depreciation methods.

• Writes off relatively larger amount of the asset’s cost in the early years of its useful life

(1) the asset’s residual value is ignored initially . In the first year, depreciation is computed on the asset’s full cost.

(2) The final year’s calculation is changed in order to bring the asset’s book value to the residual value.

• Depreciable amount is calculated by multiplying the depreciable cost of the asset by a fraction.

SYD depreciation per year = ( cost – Residual value) * Years digits(largest first)/ Sum of no. of years.

Sum-of-the-years digits.

Where does depreciation get reflected?

Balance Sheet:• The annual depreciation is a non cash expense which

is deducted from the gross profit or, cash flow from operation. This amount is shown in the P/L account of a company while the accumulated depreciation is shown in the B/S of a company

• For income tax purpose, most companies use accelerated depreciation method as it reduces the tax payable compared to straight line method.

Depreciation in the context of financial statements

Balance Sheet: Snap shot in time of a company's overall worth. It includes assets, liabilities, and owners’ or stockholders’ equity. Gross Block-Acc. Depreciation = Net Block

Profit & Loss Account: Transactions over the year.

PBDIT-Interest=PBDTPBDT-Depreciation=PBT