Economics Assignment Help
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Transcript of Economics Assignment Help
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Economics Tutorial Help
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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?
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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
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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)
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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
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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.
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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.
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What Can Depreciate?• Vehicles • Office furniture• Office equipment• Buildings you own• Machinery you use to manufacture products
What Can’t Depreciate:• Land, Inventory
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Depreciation Methods:
Four basic methods exist for computing depreciation:
• Straight-line• Units of production• Double Declining balance• Sum-of-the-years digits.
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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
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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.
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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.
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• 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.
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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.
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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