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Before making a major financial decision you
should consult a qualified professional.
is the gradual expensing of an asset over a number
of years, instead of expensing it in the year of
purchase. Usually relates to intangible assets
such as goodwill. Depreciation
is the term usually used for amortization of a fixed
also the term used when a loan is being repaid
over time. The amortization schedule is a
document which shows the payment dates, payment
amount, interest and principal portion of each
payment, and the balance of the loan after each
payment, until the balance reaches zero.
Depreciation is the expensing,
over a period of years, of the cost of fixed
assets (except land), usually based on
the estimated useful life of the fixed asset. There are various
methods of depreciation, with two of the most common being straight line and
declining balance (usually double declining balance).
With declining balance depreciation, a fixed
percentage is applied to the remaining book value (undepreciated
balance) each year to determine the depreciation amount. With
double declining balance, a percentage of twice the straight line rate
Example showing the first 5 years of declining
machinery with an estimated useful life of 5 years,
original cost $50,000
double declining balance depreciation amount, using 40% depreciation rate:
50,000 x 40% = 20,000
30,000 x 40% = 12,000
18,000 x 40% = 7,200
10,800 x 40% = 4,320
6,480 x 40% = 2,592
Straight Line Depreciation
Straight line depreciation - the original
cost of the asset is written off in equal amounts over the estimated
Example: machinery with an estimated useful life of 5 years,
original cost $50,000.
Straight line depreciation amount = $50,000/5 (or $50,000 x 20%) =
$10,000 each year
Accumulated depreciation is the accumulated total of all depreciation
which has been written off over the years against fixed
Capital Cost Allowance
When fixed assets are
depreciated for tax purposes, the depreciation is called capital cost
allowance (CCA), and the method of depreciation is usually declining
balance, using a rate designated by the Income Tax Act and Regulations.