economics notes by prof:muhammad irfan

2. DEPRECIATION, INCOME TAXES
MUHAMMAD IRFAN
Assistant Professor, Sarhad University, Peshawar.

3. DEPRECIATION
 A Decline in the value of a property due to
general wear and tear or obsolescence.
 It is an amount of value that a possession loses
over time.
 Depreciation is the cost of lost usefulness or Cost of
Diminution of service yield from a use of fixed
assets.

4. DEPRECIATION
 A Permanent Fall in the value of fixed assets
arising through wear and tear from the use of
those assets in business.
 A Gradual Decrease in the value of an asset is
known as depreciation.

5. FURTHER…
Two things to be considered about assets…
(a) Time >>> value will decrease…
(b) Use >>> value will decrease…
Value of Fixed Assets decreases with passage of
time and its utilization (use).

6. CHARACTERISTICS OF DEPRECIATION.
 It is related to Fixed Assets only.
 It is the Fall in the Book Value of asset.
 It is a Permanent Decrease in the Book Value of
an Asset.
 It is a Continuous Decrease in the Book Value of
an Asset.

7. CAUSES OF DEPRECIATION…
 Physical Wear and Tear.
 With the Passage of Time.
 Changes in Economic Environment.
 Expiration of Legal Rights.

8. WHY DEPRECIATION / NEED FOR PROVIDING
DEPRECIATION…
 To determine True Results of Operations.
 To Present True and Fair view of the Financial
Position.
 To determine the True cost of Production.
 To Comply with Legal Requirements.
 To Accumulate Funds for Replacement of Assets.

9. OBJECTIVES OF DEPRECIATION
 To calculate proper Profits.
 To show the asset as its reasonable value.
 To maintain the original Monetary Investment of
the asset intact.
 To provide for replacement of an asset.

10. CAUSES OF DEPRECIATION
INTERNAL CAUSES:
Wear and Tear, Disuse, Maintenance, Change
in Production, Restriction on Production,
Reduced Demand, Technical Progress.
EXTERNAL CAUSE:
Obsolescence.

11. DEPRECIATION…

12. STRAIGHT LINE DEPRECIATION...

13. ANSWER…

14. DECLINING BALANCE METHOD…

15. ILLUSTRATION OF THE QUESTION…

16. ANSWER FOR (A)

17. ANSWER FOR (B)

18. TAX
 A tax (from the Latin taxo) is a financial charge
imposed upon a taxpayer (an individual or legal
entity, legally allowed corporation) by a state to
fund various public expenditures…
 A failure to pay, or resistance to taxation, is
usually punished by law.

19. DATA & INFO… TAX IN PAKISTAN…
 Normally, the Corporate Tax Rate (relating to a
large company) in Pakistan stands at 33
percent.
 Corporate Tax Rate in Pakistan averaged 34.72
percent from 1997 until 2015, reaching an all
time high of 43 percent in 2000 and a record low
of 30 percent in 1998.
 Corporate Tax Rate in Pakistan is reported by
the Federal Board of Revenue, Government of
Pakistan.

20. PURPOSE OF TAX…
 Tax is a key source of funds that the
government uses to fund its activities and serve
the public.
 Money provided by taxation has been used by
states throughout history to carry out many
functions.
 Some of these include expenditures on roads,
public transportation, sanitation, legal systems,
public safety, education, healthcare systems,
military, scientific research, public works,
distribution and data collection, public
insurance, and the operation of government
itself.

21. TYPES OF TAX…
 Before discussing the consequences of taxes in
engineering economy studies, we need to distinguish
among several types of taxes.
The Major types of taxes are:
1. Income Tax
2. Property Tax
(Income Tax and Property Tax = Direct Tax)
1. Sales Tax
2. Excise Duty
3. Custom Duty
(Sales Tax, Excise Duty and Custom Duty = Indirect Tax)

22. INCOME TAX…
 A tax on the net income of an individual or a
business.
 A tax paid on the money that a person or
business receives as income.
 A charge imposed by government on the annual
gains of a person, corporation, or other taxable
unit.
 Annual charge imposed on
wages, salaries, commissions,
dividends, interests and rents.

23. INCOME TAX (CONT…)
 The first income tax imposed in America was
during the War of 1812.
 Its main purpose was to fund
the repayment of a $100 million debt that
was incurred through war-related expenses.
 After the war, the tax was repealed
(Mansookh), but income tax became
permanent during the early 20th century.

24. PROPERTY TAX…
 A property tax is imposed on the value of
property that the owner of the property is
required to pay to a Government.
 There are three general varieties of property:
land, improvements to land (immovable man-
made things, e.g. buildings) and personal
property (movable things such as livestock,
vehicles etc.).
 Property taxes are usually charged on yearly
basis.

25. PROPERTY TAX (CONT…)
 A common type of property tax is an annual charge
on the ownership of real estate, where the tax base is
the estimated value of the property.
 Real estate is property consisting of land and the
buildings on it, along with its natural resources such
as crops, minerals or water; immovable property of
this nature.

26. SALES TAX…
 A sales tax is a tax paid to the Governing
body for the sales of certain goods and
services.
 Usually laws allow (or require) the seller to
collect funds for the tax from the consumer at
the point of purchase.
 Sales taxes are levied when a commodity is
sold to its final consumer.

27. SALES TAX (CONT…)
 Commonly food items, utilities and other
necessities are exempted from sales, since
poor people spend a higher proportion of
their incomes on these commodities, so such
exemptions make the tax more progressive.
 This is the classic "You pay for what you
spend" tax, as only those who spend money
on non-exempt (i.e. luxury) items pay the tax.

28. EXCISE DUTY…
 An excise duty is a tax imposed upon specific
goods during the process of their
manufacturing, production or distribution, and is
usually proportionate to their quantity or value.
 A tax on a good produced for sale within a
country.
 Excise duties were first introduced into England
in the year 1643.
 These duties consisted of charges on beer, ale,
cider, cherry wine and tobacco, to which list
were afterwards added paper, soap, candles,
malt and sweets etc.

29. EXCISE DUTY (CONT…)
 Excises are also used to modify consumption
patterns of a certain area.
 For example, a high excise is used to
discourage alcohol consumption, relative to
other goods.
 A carbon tax is a tax on the consumption of
carbon-based non-renewable fuels, such as
petrol, diesel-fuel, jet fuels, and natural gas.
 The objective is to reduce the release of carbon
into the atmosphere.

30. CUSTOM DUTY…
 A Tax imposed on goods when transferred across
international borders.
 The purpose of custom duty is to protect each country’s
economy, residents, jobs, environment etc by controlling the
flow of goods, especially restrictive and prohibited goods,
into and out of the country.
 A Tax levied on imports by the custom authorities of a
country to raise state revenue and to protect domestic
industries from more efficient competitors from abroad.

31. DETERMINATION OF TAXABLE INCOME…
 Example: A company generates $1,500,000 of
gross income during a tax year and incurs operating
expenses of $800,000. Property taxes on business assets
amount to $48,000. The total depreciation deductions for
the tax year equal to $144,000.
What is the taxable income of this firm?
Solution:
Taxable income = Gross income – All expenses except
capital investment – Depreciation deductions
Taxable income = $1,500,000 - $800,000 - $48,000 -
$144,000
Taxable income = $538,000

32. Thank You…