Capital Market Chronicles – Episode 124: DEPRECIATION IN AN INCOME STATEMENT (Part II)

 📉 Capital Market Chronicles – Episode 124: DEPRECIATION IN AN INCOME STATEMENT (Part II)

The Tale of the Disappearing Asset Value – Now With More Methods, Tax Twists, and Emotional Wear & Tear! 😅

Welcome back, brave number wrangler! In Part I, we learned how even assets get tired and slowly vanish from the books like forgotten gym memberships. Now in Part II, we get a front-row seat to the magic tricks of depreciation methods, explore their impact on taxes, and meet their shady cousins: amortisation and depletion. 🎩📚

🧮 DEPRECIATION METHODS – THE CAST OF CHARACTERS

1. 🟦 Straight-Line Depreciation
   The "Boring but Reliable" Accountant of the story.
   👉 It spreads the cost equally over the years. No drama.
   💡 Example: Bought a machine for ₹10,00,000 with a 5-year life?
   You’ll write off ₹2,00,000 every year like clockwork.
   🕰️ It’s the Swiss watch of depreciation.

2. 🟧 Written-Down Value (Declining Balance)
   The “Let’s front-load the pain” approach.
   👉 Depreciates more in the early years when the asset is fresh and fancy.
   💡 Example: A 20% depreciation rate means the asset loses 20% of its current value every year, not the original cost!
   📉 Year 1 = ₹2,00,000 → Year 2 = ₹1,60,000 → Year 3 = ₹1,28,000 → and so on…
   🎢 The depreciation curve here is more like a roller coaster!

💰 WHY INVESTORS SHOULD CARE (No, Really!)

• 💸 It’s a Non-Cash Expense: So yes, it hurts your profit numbers, but your bank account is untouched. It’s all for show (well, almost).

• 🏗️ Clues About Asset Age: High depreciation? Might be an asset graveyard behind the company HQ.

• 🔍 Window into Management Strategy: How they depreciate tells you if they’re cautious, creative, or downright sneaky. Especially when policies suddenly change... hmm 🤔

🧠 RELATED CONCEPTS THAT SOUND LIKE COUSINS:

• 📜 Amortisation
  Not for physical stuff. This is for your company’s “invisible friends” – like patents, trademarks, goodwill.
  If depreciation is ageing furniture, amortisation is ageing your brand name. 🛋️💼

• ⛏️ Depletion
  For companies that dig things up (literally). Think oil, minerals, coal.
  It’s the "my product disappears with every sale" method.🛢️💎

📚 WHERE TO FIND THESE SNEAKY DETAILS?

• 🧾 Balance Sheet Schedules – Check for “accumulated depreciation” (it’s like a savings account of wear and tear).

• 📘 Annual Report Notes – Where the juicy depreciation policies are buried.

• ⚙️ Significant Accounting Policies – Translation: “Here’s how we legally get away with this.”

• 🧐 Notes to Accounts – For the fine print nerds. Respect.

🧮 EXPANDED EXAMPLE (Because who doesn’t love large machinery?)

Let’s say a company buys a machine for ₹50,00,000
👉 Useful life = 10 years
👉 Residual value = ₹5,00,000

🎯 Using Straight-Line:

Depreciation = (₹50,00,000 - ₹5,00,000) / 10 = ₹4,50,000 per year

Every year, ₹4,50,000 quietly walks out of the income statement like an old employee nearing retirement. 👴📉

💼 DEPRECIATION AND TAXES: WHERE THE REAL ACTION IS 🎯

• 🛡️ Tax Shield Effect: Depreciation reduces taxable income. Less tax = happy CFO.
  “It’s not tax evasion, it’s tax planning, Your Honour!”

• 🚀 Accelerated Depreciation: Front-load the depreciation to get bigger tax deductions sooner.
  This is basically the accounting equivalent of “buy now, cry later.” 😅

• 🧾 Book-Tax Differences: Using one method for tax and another for accounting? Welcome to the wild world of deferred tax.
  Your accountant now needs coffee. A lot of coffee. ☕☕☕☕

⚖️ IN SHORT…

Whether you’re straight-lining it or riding the declining balance coaster, depreciation is more than a dry accounting term. It’s a powerful tool to manage profits, cash flows, and taxes—and tell stories about how a company treats its assets.

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