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2. 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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3. Types of Deficit: Revenue Deficit
Revenue 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 Revenue
Non-Tax Revenue
Interest receipts; Dividends; Profits; Grants

4. Types of Deficit: Capital Deficit
 Deficit on Capital Account =
Capital Expenditure – Capital Receipts
Capital Expenditure
Plan Capital Expenditure
Central plan; Central assistance to plan of states and
the UTs
Non-Plan Capital Expenditure
Defense expenditure and other non-plan outlay on
capital account; Loans to public sector enterprises,
states and UTs, foreign governments and others
Capital Receipts
Recoveries; Borrowings; Other capital receipts (e.g.,
sale of government assets)

5. 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

6. 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.

7. 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.

8. What Can Depreciate?
• Vehicles
• Office furniture
• Office equipment
• Buildings you own
• Machinery you use to manufacture products
What Can’t Depreciate:
• Land, Inventory

9. Depreciation Methods:
Four basic methods exist for
computing depreciation:
• Straight-line
• Units of production
• Double Declining balance
• Sum-of-the-years digits.

10. 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

11. 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.

12. 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.

13. • 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.

14. 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.

15. 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=PBDT
PBDT-Depreciation=PBT