Commercial Banks:

Banking Activities Performed, Types of Banks

In our routine life, we must have visited banks. These banks help us in many
banking activities like maintaining our savings account, depositing cash, and
withdrawing the same, thus we see these banks are always at our service.
These are the commercial banks, which operate commercially for serving the
common people.

Commercial banks have a lot of other functions to do than what is

mentioned above. What are those functions? What will happen if the
commercial banks cease to perform all the banking activities? Are there any
other types of banks that might help the masses? All these questions will be
addressed in our discussion that is based on the functions of Commercial
Banks.

What are Commercial Banks?

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Before diving straight into the topic of functions of commercial banks, first, it
is obligatory to know what are Commercial Banks.

A commercial bank is a typical financial institution that accepts as well as

deposits from the general public and also, they give loans for the purposes of
consumption activities and investment activities, to make their own profit.

Commercial banks are profit-based institutions that offer financial services

like loans, as well as services like deposits, electronic transfers of funds, etc.
to their customers. Commercial banks have a significant role in a country’s
economy as these organizations fulfill the short and mid-term financial
requirements of industries.
The functions of commercial banks are primarily based on a business model
of accepting public deposits and utilizing that fund for various investment
purposes. Such functions can be classified into two categories, primary and
secondary functions.

These functions will be discussed in our upcoming section.

What are the Functions of Commercial Bank?

Commercial Banks have both primary and secondary functions that as

explained in detail below.

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Primary Functions

 Accepting Deposits – Commercial banks accept deposits from their

customers in the form of saving, fixed, and current deposits.
 Savings Deposits – Savings deposits allow a customer to credit funds
towards their accounts for up to a certain limit. These deposits are
preferred by individuals with a fixed income, utilized to create savings
over time.
 Fixed Deposits – Fixed deposits come with a predetermined lock-in
period. Fixed deposits are also referred to as time deposits as the
funds are deposited for a specific time frame.
 Current Deposits – Current deposits allow account holders to deposit
and withdraw money whenever necessary. In some cases, current
accounts also offer overdrafts until a pre-specified limit to individuals
and businesses.
 Providing Loans – One of the main functions of commercial banks is
providing credit to organizations and individuals, and profit from the
earned interest. Usually, banks retain a small reserve for their
expenses while offering the remaining amount to customers as various
types of short and long-term credits.
  Credit Creation – A unique function of commercial banks is credit
creation. Instead of offering liquid cash, banks create a line of credit
and transfer the loan to a business or commercial body all at once.

Categories of Secured and Unsecured Loans provided by

Commercial Banks

 Cash Credit – Commercial Banks and their Functions include extending

advances to individuals and organizations against bonds, inventories,
and other types of securities. This facility, commonly known as cash
credit, provides a more substantial sum when compared to other
forms of credit.
 Short-Term Credits – Short-term loans are usually pledged without
any security, offering a smaller loan amount and repayment tenor.
These are also referred to as personal loans.

Secondary Functions

The following can be considered as the secondary functions of commercial

banks –
 Providing locker Facilities – Commercial banks provide locker
facilities to customers who want to store valuables safely. Locker
facilities eliminate the impending risk of theft or loss, which prevail
when kept at home.
 Dealing in Foreign Exchange – Commercial banks help provide
foreign exchange to individuals and organizations that export or
import goods from overseas. However, only certain banks which have
the license to deal in foreign exchange are eligible for such
transactions.
 Exchange of Securities – Another function of commercial banks is to
trade in bonds and securities. Customers can purchase or sell the units
from the financial institution itself, which offers more convenience than
alternate approaches.
  Discounting Bills of Exchange – The main function of a commercial
bank in today’s date is to discount bills of businesses. Bill discounting is
considered a profitable investment for banks. Bills create a steady flow
of funds, while not becoming a risky venture during payment as it is
considered as a negotiable instrument. These also do not involve the
financial institution in any litigation.
 Bank as an Agent – Commercial Bank and its Function also require
them to provide finance-related services to customers, fulfilling the
role of an agent. These services usually include –

 Acting as an administrator, trustee, or executor of a customer-

owned estate.
 Assisting customers with tax returns, tax refunds, and other
similar tasks.
 Serving as a platform to pay premiums, repay loan installments,
etc.
 Offering a platform for electronic transaction of funds,
processing of cheques, drafts, bills, etc.

Importance of Commercial Banks

Thus, we now know how important are commercial banks in performing the
balanced function in an economy. In a parallel universe, if commercial banks
cease to perform these banking functions, then the economy will collapse
out of thirst for money liquidity. Along with the growth, economic and social
stability will be shattered completely.

Types of Commercial Banks

It is necessary to understand the different types of financial institutions to

explain the functions of commercial banks effectively. Commercial banks are
commonly categorized into three types. They are as follows:
 Public sector banks
 Private sector banks
  Foreign banks

Public Sector Banks

Public sector banks refer to a type of financial institution that is state-owned

by the corresponding Government. A significant part of the share of such
organizations is held by the Government. In India, the Reserve Bank of India,
which acts as the central bank, creates operating guidelines for the public
sector banks.

Private Sector Banks

Private sector banks are financial institutions registered as companies with

limited liabilities. The major part of the share capital of such companies is
owned by individuals or private businesses.

Foreign Banks

Foreign banks are financial institutions that are operating overseas within a
foreign nation. Post the financial reform of India (in 1991), there was a
marked increase in the number of foreign banks on Indian soil. They are
essential for the economic development of a nation.

Apart from these commercial banks that lend and deposit money, there is
Central Bank which is known as the ‘head honcho’ in terms of banks. The
Central Bank supervises the commercial banks, sets their interest rates, and
controls the money flow in the economy. This bank, unlike the commercial
banks, does not engage with the general public in terms of providing banking
services. Thus, Central Bank will never be as helpful as commercial banks to
the general mass

Did You Know?

In this section, we will know about some interesting commercial banking
facts.
 Allahabad bank is the oldest joint stock bank existing in India.
 Bank of India was the first bank to open branches in foreign nations.
  Canara Bank is the first bank to be receiving the ISO 9002 Certificate.
 Bharatiya Mahila Bank is the first all-women bank formed in India.
 Reserve Bank of India served as the central bank of two countries at a
time. It was the central bank for Pakistan after the partition of India
until June 1948.

From the above-mentioned details, you will get a clear idea about
commercial bank definition as well as its functions. For more information on
the discussed topic students can refer to Vedantu’s website today. They can
also avail study solutions on the introduction of commercial banks from us
and avail a detailed idea

. How do Commercial Banks function?

Commercial Banks provide banking services to the general public like checking and
savings bank accounts, providing loans and mortgages, depositing their cash in safe
individual accounts. For all these services, the commercial banks charge a service
fee or bank charges, also while providing a loan bank too charges a specific interest,
all these ways the Commercial Banks function regularly. For more information on
the discussed topic refer to Vedantu’s website or app today.

2. Give some examples of Commercial Banks in India.

Examples of Commercial banks in India include:

 State Bank of India

 ICICI Bank

 HDFC bank

 Axis Bank

 Kotak Mahindra Bank

 IndusInd Bank
  Bank of Baroda

 Punjab National Bank

 Yes Bank

3. Is my bank a Commercial Bank?

In all probability, yes! if you are a common or general public. Whenever the word
‘bank’ is uttered we consider it to be the commercial bank. Commercial banks
directly link with the common public hence, generally, people do not talk about the
RBI when they converse with the term ‘bank’.

4. What is a Commercial Bank?

As per commercial bank meaning, the financial institution is an entity that offers
essential monetary services to individuals and organizations alike. Commercial
banks offer loans, deposits, savings accounts, etc. to their customers.

There are primarily 3 types of commercial banks - public sector, private sector, and
foreign banks. All of them contribute to a crucial part of a nation’s economy.

5. Give examples of functions of Commercial Banks?

The primary function of a commercial bank is to accept deposits from customers

and provide lines of credit to prospective borrowers. However, there are several
other functions that a commercial bank can undertake. These include –
• Credit creation.

• Investment of funds.

• Discounting bills of exchange.

• Offering overdraft facilities.

• Agency functions.

• Offering the locker facility.

• Dealing in foreign exchange.

• Exchanging securities.

These include both the primary and secondary functions of commercial banks.

Role of Commercial Banks in the

Economy
It is very important to note that the commercial bank plays a great role in
the economy of a particular country. These banks provide financial services
to their customers in all fields and they should not waste the financial
messages which come from their bank.

1) Financial services: It provides necessary financial services with proper

regulation as well as management. It helps to provide cash for lending and
other business activities, which are being performed by the general public.

2) Safe custody: Commercial banks are known for depositing and

safekeeping of cash and deposit money. This institution must be able to
properly keep and store all the money deposited by the general public in its
vault.
3) Other Financial Services: Commercial banks offer many other financial
services such as payment of salaries, business loans, etc. This bank plays
an important role in the economic growth of a particular country.

4) Keep track of their Clients: Commercial banks are known for

developing their own database and database management system. Banks
take strict concern about the development of database systems and hiring
trained staff for this purpose.

Special Features of Commercial Banks

First, commercial banks must maintain a low rate of inflation at all times.
Also, it should be capable of following prudent economic policies and
maintaining an adequate level of reserves in its vault.

Secondly, a commercial bank should always look to improve the rate

structure of its employees. Last but not least, a commercial bank should be
capable of investing in the fund which is available in its vault at better rates.

Lastly, a commercial bank should maintain steady contact with other

central banks of other countries in order to improve its monetary

policies.
 Conclusion
This article has highlighted the differences between central banks and
commercial banks. The Central Bank is the most important financial
institution while commercial banks provide financial services to the general
public. Central banks are also considered the lender of last resort due to
some special features which commercial banks don’t have. Anyway, this
article has tried to highlight these features in detail. So, you can choose
either a central bank or commercial bank as your choice for better
purchase/service on your future needs
Introduction
The central bank and Commercial bank are the important financial
institutions of a country. The central bank is an institution that is
responsible for the monetary policies of the country while the
commercial bank provides banking and other financial services to the
general public

The central bank is one of the most important institutions of any

particular country because it plays an important role in managing a
country’s monetary policies. It helps to maintain economic growth
and stability in that particular country. The Central Bank also acts as
a banker to commercial banks and it holds a fractional reserve
banking system under its control. If we talk about India then the
Reserve Bank of India (RBI) is considered the central bank of our
country

1 Commercial
Bank:
Definition,
Function,
Credit
Creation
and
Significances!
Meaning of Commercial
Banks:
A commercial bank is a
financial institution which
performs the functions of
accepting deposits from the
general public and giving
loans for investment
with the aim of earning
profit.
In fact, commercial banks, as
their name suggests, axe
profit-seeking
institutions, i.e., they do
banking business to earn
profit.
They generally finance trade
and commerce with short-
term loans. They
charge high rate of interest
from the borrowers but pay
much less rate of
Interest to their depositors
with the result that the
difference between the two
rates of interest becomes the
main source of profit of the
banks. Most of the
Indian joint stock Banks are
Commercial Banks such as
Punjab National Bank,
Allahabad Bank, Canara
Bank, Andhra Bank, Bank of
Baroda, etc

Abstract
An institutin that provides services like accepting the deposits, providing
business loans, and offering basic investment products is known as the
commercial banks. It is largely a division of a large bank which deals with
loan and deposit services provided to large and small size businesses.
Thus, there are many functions of commercial banks in India. Mainly
there are two functions, primary and secondary.
The major source of funds in the bank’s deposits. This deposit consists
only of money and not of any assets. For these deposits held, the
commercial banks provide the interest.

Thus, it helps in the mobilizing of the savings. For the deposits, there are a
variety of options available. These include current account, savings
account, recurring accounts, and fixed deposit accounts.

Depreciation
.

In accountancy, depreciation is a term that refers to two aspects of the same concept: first, an
actual reduction in the fair value of an asset, such as the decrease in value of factory equipment
each year as it is used and wears, and second, the allocation in accounting statements of the
original cost of the assets to periods in which the assets are used (depreciation with the matching
principle).[1]

Depreciation is thus the decrease in the value of assets and the method used to reallocate, or "write
down" the cost of a tangible asset (such as equipment) over its useful life span. Businesses
depreciate long-term assets for both accounting and tax purposes. The decrease in value of the
asset affects the balance sheet of a business or entity, and the method of depreciating the asset,
accounting-wise, affects the net income, and thus the income statement that they report. Generally,
the cost is allocated as depreciation expense among the periods in which the asset is expected to be
used.

Accounting concept
In determining the net income (profits) from an activity, the receipts from the activity must be
reduced by appropriate costs. One such cost is the cost of assets used but not immediately
consumed in the activity.[2] Such cost allocated in a given period is equal to the reduction in the value
placed on the asset, which is initially equal to the amount paid for the asset and subsequently may
or may not be related to the amount expected to be received upon its disposal. Depreciation is any
method of allocating such net cost to those periods in which the organization is expected to benefit
from the use of the asset. Depreciation is a process of deducting the cost of an asset over its useful
life.[3] Assets are sorted into different classes and each has its own useful life. The asset is referred to
as a depreciable asset. Depreciation is technically a method of allocation, not valuation, [4] even
though it determines the value placed on the asset in the balance sheet.

Any business or income-producing activity[5] using tangible assets may incur costs related to those
assets. If an asset is expected to produce a benefit in future periods, some of these costs must be
deferred rather than treated as a current expense. The business then records depreciation expense
in its financial reporting as the current period's allocation of such costs. This is usually done in a
rational and systematic manner. Generally, this involves four criteria:

 Cost of the asset

 Expected salvage value, also known as the residual value of the assets
 Estimated useful life of the asset
 A method of apportioning the cost over such life[6]
Depreciable basis
Cost generally is the amount paid for the asset, including all costs related to acquiring and bringing
the asset into use.[7] In some countries or for some purposes, salvage value may be ignored. The
rules of some countries specify lives and methods to be used for particular types of assets.
However, in most countries the life is based on business experience, and the method may be
chosen from one of several acceptable methods.

Impairment
Accounting rules also require that an impairment charge or expense be recognized if the value of
assets declines unexpectedly.[8] Such charges are usually nonrecurring and may relate to any type of
asset. Many companies consider write-offs of some of their long-lived assets because some
property, plant, and equipment have suffered partial obsolescence. Accountants reduce the asset's
carrying amount by its fair value. For example, if a company continues to incur losses because
prices of a particular product or service are higher than the operating costs, companies consider
write-offs of the particular asset. These write-offs are referred to as impairments. There are events
and changes in circumstances might lead to impairment. Some examples are:
 Large amount of decrease in fair value of an asset
 A change of manner in which the asset is used
 Accumulation of costs that are not originally expected to acquire or construct an asset
 A projection of incurring losses associated with the particular asset
Events or changes in circumstances indicate that the company may not be able recover the carrying
amount of the asset. In which case, companies use the recoverability test to determine whether
impairment has occurred. The steps to determine are:

1. Estimate the future cash flow of asset (from the use of the asset to disposition)
2. If the sum of the expected cash flow is less than the carrying amount of the asset, the asset
is considered impaired
Depletion and amortization
Depletion and amortization are similar concepts for natural resources (including oil) and intangible
assets, respectively.

Effect on cash
Depreciation expense does not require a current outlay of cash. However, since depreciation is an
expense to the P&L account, provided the enterprise is operating in a manner that covers its
expenses (e.g., operating at a profit) depreciation is a source of cash in a statement of cash flows,
which generally offsets the cash cost of acquiring new assets required to continue operations when
existing assets reach the end of their useful lives.

Accumulated depreciation
While depreciation expense is recorded on the income statement of a business, its impact is
generally recorded in a separate account and disclosed on the balance sheet as accumulated under
fixed assets, according to most accounting principles. Accumulated depreciation is known as
a contra account, because it separately shows a negative amount that is directly associated with an
accumulated depreciation account on the balance sheet. Depreciation expense is usually charged
against the relevant asset directly. The values of the fixed assets stated on the balance sheet will
decline, even if the business has not invested in or disposed of any assets. Theoretically, the
amounts will roughly approximate fair value. Otherwise, depreciation expense is charged against
accumulated depreciation. Showing accumulated depreciation separately on the balance sheet has
the effect of preserving the historical cost of assets on the balance sheet. If there have been no
investments or dispositions in fixed assets for the year, then the values of the assets will be the
same on the balance sheet for the current and prior year (P/Y).

Methods for depreciation

There are several methods for calculating depreciation, generally based on either the passage of
time or the level of activity (or use) of the asset.

Straight-line depreciation
Straight-line depreciation is the simplest and most often used method. The straight-line depreciation
is calculated by dividing the difference between assets pagal sale cost and its expected salvage
value by the number of years for its expected useful life. (The salvage value may be zero, or even
negative due to costs required to retire it; however, for depreciation purposes salvage value is not
generally calculated at below zero.) The company will then charge the same amount to depreciation
each year over that period, until the value shown for the asset has reduced from the original cost to
the salvage value.

Straight-line method:

DE=(Cost-SL)/UL

For example, a vehicle that depreciates over 5 years is purchased at a cost of $17,000 and will
have a salvage value of $2000. Then this vehicle will depreciate at $3,000 per year, i.e. (17-2)/5
= 3. This table illustrates the straight-line method of depreciation. Book value at the beginning of
the first year of depreciation is the original cost of the asset. Book value equals original cost
minus accumulated depreciation.

book value = original cost − accumulated depreciation Book value at the end of year
becomes book value at the beginning of next year. The asset is depreciated until the book value
equals scrap value.

Depreciatio Accumulated
Book value
n depreciation
at year-end
expense at year-end

(original cost) $17,000

$3,000 $3,000 $14,000

3,000 6,000 11,000

3,000 9,000 8,000

3,000 12,000 5,000

3,000 15,000 (scrap value) 2,000

If the vehicle were to be sold and the sales price exceeded the depreciated value (net book
value) then the excess would be considered a gain and subject to depreciation recapture. In
addition, this gain above the depreciated value would be recognized as ordinary income by the
tax office. If the sales price is ever less than the book value, the resulting capital loss is tax-
deductible. If the sale price were ever more than the original book value, then the gain above the
original book value is recognized as a capital gain.
If a company chooses to depreciate an asset at a different rate from that used by the tax office,
then this generates a timing difference in the income statement due to the difference (at a point
in time) between the taxation department's and company's view of the profit.

Diminishing balance method

Depreciatio
Depreciation Accumulated Book value at
n
rate depreciation year-end
expense

original cost $1,000.00

40% 400.00 400.00 600.00

40% 240.00 640.00 360.00

40% 144.00 784.00 216.00

40% 86.40 870.40 129.60

129.60 - 100.00 29.60 900.00 scrap value 100.00

The double-declining-balance method, or reducing balance method,[9] is used to calculate an

asset's accelerated rate of depreciation against its non-depreciated balance during earlier years
of assets useful life. When using the double-declining-balance method, the salvage value is not
considered in determining the annual depreciation, but the book value of the asset being
depreciated is never brought below its salvage value, regardless of the method used.
Depreciation ceases when either the salvage value or the end of the asset's useful life is
reached.

Since double-declining-balance depreciation does not always depreciate an asset fully by its end
of life, some methods also compute a straight-line depreciation each year, and apply the greater
of the two. This has the effect of converting from declining-balance depreciation to straight-line
depreciation at a midpoint in the asset's life. The double-declining-balance method is also a
better representation of how vehicles depreciate and can more accurately match cost with
benefit from asset use.[citation needed] The company in the future may want to allocate as little
depreciation expenses as possible to help with additional expenses.

With the declining balance method, one can find the depreciation rate that would allow exactly
for full depreciation by the end of the period, using the formula:
 ,

where N is the estimated life of the asset (for example, in years).

Annuity depreciation
Annuity depreciation methods are not based on time, but on a level of Annuity. This could be
miles driven for a vehicle, or a cycle count for a machine. When the asset is acquired, its life is
estimated in terms of this level of activity. Assume the vehicle above is estimated to go 50,000
miles in its lifetime. The per-mile depreciation rate is calculated as: ($17,000 cost - $2,000
salvage) / 50,000 miles = $0.30 per mile. Each year, the depreciation expense is then calculated
by multiplying the number of miles driven by the per-mile depreciation rate.

Sum-of-years-digits method
Sum-of-years-digits is a spent depreciation method that results in a more accelerated write-off
than the straight-line method, and typically also more accelerated than the declining balance
method. Under this method, the annual depreciation is determined by multiplying the
depreciable cost by a schedule of fractions.

Sum of the years' digits method of depreciation is one of the accelerated depreciation
techniques which are based on the assumption that assets are generally more productive when
they are new and their productivity decreases as they become old. The formula to calculate
depreciation under SYD method is:

SYD depreciation = depreciable base x (remaining useful life/sum of the years' digits)
depreciable base = cost − salvage value

Example: If an asset has original cost of $1000, a useful life of 5 years and a salvage value of
$100, compute its depreciation schedule.

First, determine the years' digits. Since the asset has a useful life of 5 years, the years' digits
are: 5, 4, 3, 2, and 1.

Next, calculate the sum of the digits: 5+4+3+2+1=15

The sum of the digits can also be determined by using the formula (n 2+n)/2 where n is equal to
the useful life of the asset in years. The example would be shown as (5 2+5)/2=15

Depreciation rates are as follows:

5/15 for the 1st year, 4/15 for the 2nd year, 3/15 for the 3rd year, 2/15 for the 4th year, and 1/15
for the 5th year.

Depreciatio
Depreciable Depreciation Accumulated Book value at
n
base expense depreciation end of year
rate
 $1,000 (original cost)

900 5/15 300 =(900 x 5/15) 300 700

900 4/15 240 =(900 x 4/15) 540 460

900 3/15 180 =(900 x 3/15) 720 280

900 2/15 120 =(900 x 2/15) 840 160

900 1/15 60 =(900 x 1/15) 900 100 (scrap value)

Units-of-production depreciation method

Units-of-production depreciation method calculates greater deductions for depreciation in years
when the asset is heavily used

DE= ((OV-SV)/EPC) x Units per year

Suppose an asset has original cost $70,000, salvage value $10,000, and is expected to
produce 6,000 units.

Depreciation per unit = ($70,000−10,000) / 6,000 = $10

10 × actual production will give the depreciation cost of the current year.

The table below illustrates the units-of-production depreciation schedule of the asset.

Units of Depreciatio
Depreciation Accumulated Book value at
productio n
cost per unit depreciation year-end
n expense

$70,000 (original
cost)
 1,000 10 10,000 10,000 60,000

1,100 10 11,000 21,000 49,000

1,200 10 12,000 33,000 37,000

1,300 10 13,000 46,000 24,000

1,400 10 14,000 60,000 10,000 (scrap value)

Depreciation stops when book value is equal to the scrap value of the asset. In the end, the
sum of accumulated depreciation and scrap value equals the original cost.

Group depreciation method[edit]

The group depreciation method is used for depreciating multiple-asset accounts using a
similar depreciation method. The assets must be similar in nature and have approximately
the same useful lives.

Composite depreciation method[edit]

The composite method is applied to a collection of assets that are not similar and have
different service lives. For example, computers and printers are not similar, but both are part
of the office equipment. Depreciation on all assets is determined by using the straight-line-
depreciation method.

Historica Depreciatio
Salvage Depreciable
Asset l Life n
value cost
cost per year

Computers $5,500 $500 $5,000 5 $1,000

Printers $1,000 $100 $900 3 $300

Total $6,500 $600 $5,900 4.5 $1,300

Composite life equals the total depreciable cost divided by the total depreciation per year.
$5,900 / $1,300 = 4.5 years.
Composite depreciation rate equals depreciation per year divided by total historical cost.
$1,300 / $6,500 = 0.20 = 20%

Depreciation expense equals the composite depreciation rate times the balance in the
asset account (historical cost). (0.20 * $6,500) $1,300. Debit depreciation expense and
credit accumulated depreciation.

When an asset is sold, debit cash for the amount received and credit the asset account for
its original cost. Debit the difference between the two to accumulated depreciation. Under
the composite method, no gain or loss is recognized on the sale of an asset. Theoretically,
this makes sense because the gains and losses from assets sold before and after the
composite life will average themselves out.

To calculate composite depreciation rate, divide depreciation per year by total historical
cost. To calculate depreciation expense, multiply the result by the same total historical cost.
The result will equal the total depreciation per year again.

Common sense requires depreciation expense to be equal to total depreciation per year,
without first dividing and then multiplying total depreciation per year by the same number.

Tax depreciation
Most income tax systems allow a tax deduction for recovery of the cost of assets used in a
business or for the production of income. Such deductions are allowed for individuals and
companies. Where the assets are consumed currently, the cost may be deducted currently
as an expense or treated as part of cost of goods sold. The cost of assets not currently
consumed generally must be deferred and recovered over time, such as through
depreciation. Some systems permit the full deduction of the cost, at least in part, in the year
the assets are acquired. Other systems allow depreciation expense over some life using
some depreciation method or percentage. Rules vary highly by country and may vary within
a country based on the type of asset or type of taxpayer. Many systems that specify
depreciation lives and methods for financial reporting require the same lives and methods
be used for tax purposes. Most tax systems provide different rules for real property
(buildings, etc.) and personal property (equipment, etc.).[10]

Capital allowances
A common system is to allow a fixed percentage of the cost of depreciable assets to be
deducted each year. This is often referred to as a capital allowance, as it is called in
the United Kingdom. Deductions are permitted to individuals and businesses based on
assets placed in service during or before the assessment year. Canada's Capital Cost
Allowance are fixed percentages of assets within a class or type of asset. Fixed percentage
rates are specified by the type of asset. The fixed percentage is multiplied by the tax basis
of assets in service to determine the capital allowance deduction. The tax law or regulations
of the country specifies these percentages. Capital allowance calculations may be based on
the total set of assets, on sets or pools by year (vintage pools) or pools by classes of
assets... Depreciation has got three methods only.

Tax lives and methods

Some systems specify lives based on classes of property defined by the tax authority.
Canada Revenue Agency specifies numerous classes based on the type of property and
how it is used. Under the United States depreciation system, the Internal Revenue
 Service publishes a detailed guide which includes a table of asset lives and the applicable
conventions. The table also incorporates specified lives for certain commonly used assets
(e.g., office furniture, computers, automobiles) which override the business use lives. U.S.
tax depreciation is computed under the double-declining balance method switching to
straight line or the straight-line method, at the option of the taxpayer. [11] IRS tables specify
percentages to apply to the basis of an asset for each year in which it is in service.
Depreciation first becomes deductible when an asset is placed in service.

Additional depreciation
Many systems allow an additional deduction for a portion of the cost of depreciable assets
acquired in the current tax year. The UK system provides a first-year capital allowance of
£50,000. In the United States, two such deductions are available. A deduction for the full
cost of depreciable tangible personal property is allowed up to $500,000 through 2013. This
deduction is fully phased out for businesses acquiring over $2,000,000 of such property
during the year.[12] In addition, additional first year depreciation of 50% of the cost of most
other depreciable tangible personal property is allowed as a deduction.[13] Some other
systems have similar first year or accelerated allowances.

Real property
Many tax systems prescribe longer depreciable lives for buildings and land improvements.
Such lives may vary by type of use. Many such systems, including the United States, permit
depreciation for real property using only the straight-line method, or a small fixed percentage
of the cost. Generally, no depreciation tax deduction is allowed for bare land. In the United
States, residential rental buildings are depreciable over a 27.5 year or 40-year life, other
buildings over a 39 or 40-year life, and land improvements over a 15 or 20-year life, all using
the straight-line method.[14]

Averaging conventions
Depreciation calculations require a lot of record-keeping if done for each asset a business
owns, especially if assets are added to after they are acquired, or partially disposed of.
However, many tax systems permit all assets of a similar type acquired in the same year to
be combined in a "pool". Depreciation is then computed for all assets in the pool as a single
calculation. These calculations must make assumptions about the date of acquisition. The
United States system allows a taxpayer to use a half-year convention for personal property
or mid-month convention for real property.[15] Under such a convention, all property of a
particular type is considered to have been acquired at the midpoint of the acquisition period.
One half of a full period's depreciation is allowed in the acquisition period (and also in the
final depreciation period if the life of the assets is a whole number of years). United States
rules require a mid-quarter convention for per property if more than 40% of the acquisitions
for the year are in the final quarter

Depreciation is an accounting concept through which businesses calculate the declining values
of their assets over time. The introduction of depreciation means a fall in the value of assets with
time due to use or obsolescence. It is regarded as a non-cash transaction and does not
represent real cash flow. So here's the depreciation introduction and further, we'll cover
depreciation methods in India, depreciation presentation, and accounting for depreciation
methods.
Investors and analysts must know how choosing either depreciation method will impact the
income statement and balance sheet of a business in the short term. The depreciation method
can so much as affect the book value and net value asset (NAV) significantly. For instance,
choosing the straight-line method will reduce earnings and increase costs and increase earnings-
per-share of the business. Similarly, depreciation assumptions do not signal an improvement in
the performance of the business. The depreciation pdf notes are helpful to know more about it.

1 Commercial
Bank:
Definition,
Function,
Credit
Creation
and
Significances!
Meaning of Commercial
Banks:
A commercial bank is a
financial institution which
performs the functions of
accepting deposits from the
general public and giving
loans for investment
with the aim of earning
profit.
In fact, commercial banks, as
their name suggests, axe
profit-seeking
institutions, i.e., they do
banking business to earn
profit.
They generally finance trade
and commerce with short-
term loans. They
charge high rate of interest
from the borrowers but pay
much less rate of
Interest to their depositors
with the result that the
difference between the two
rates of interest becomes the
main source of profit of the
banks. Most of the
Indian joint stock Banks are
Commercial Banks such as
Punjab National Bank,
Allahabad Bank, Canara
Bank, Andhra Bank, Bank of
Baroda, etc
1 Commercial
Bank:
Definition,
Function,
Credit
Creation
and
Significances!
Meaning of Commercial
Banks:
A commercial bank is a
financial institution which
performs the functions of
accepting deposits from the
general public and giving
loans for investment
with the aim of earning
profit.
In fact, commercial banks, as
their name suggests, axe
profit-seeking
institutions, i.e., they do
banking business to earn
profit.
They generally finance trade
and commerce with short-
term loans. They
charge high rate of interest
from the borrowers but pay
much less rate of
Interest to their depositors
with the result that the
difference between the two
rates of interest becomes the
main source of profit of the
banks. Most of the
Indian joint stock Banks are
Commercial Banks such as
Punjab National Bank,
Allahabad Bank, Canara
Bank, Andhra Bank, Bank of
Baroda, etc
1 Commercial
Bank:
Definition,
Function,
Credit
Creation
and
Significances!
Meaning of Commercial
Banks:
A commercial bank is a
financial institution which
performs the functions of
accepting deposits from the
general public and giving
loans for investment
with the aim of earning
profit.
In fact, commercial banks, as
their name suggests, axe
profit-seeking
institutions, i.e., they do
banking business to earn
profit.
They generally finance trade
and commerce with short-
term loans. They
charge high rate of interest
from the borrowers but pay
much less rate of
Interest to their depositors
with the result that the
difference between the two
rates of interest becomes the
main source of profit of the
banks. Most of the
Indian joint stock Banks are
Commercial Banks such as
Punjab National Bank,
Allahabad Bank, Canara
Bank, Andhra Bank, Bank of
Baroda, etc
1 Commercial
Bank:
Definition,
Function,
Credit
Creation
and
Significances!
Meaning of Commercial
Banks:
A commercial bank is a
financial institution which
performs the functions of
accepting deposits from the
general public and giving
loans for investment
with the aim of earning
profit.
In fact, commercial banks, as
their name suggests, axe
profit-seeking
institutions, i.e., they do
banking business to earn
profit.
They generally finance trade
and commerce with short-
term loans. They
charge high rate of interest
from the borrowers but pay
much less rate of
Interest to their depositors
with the result that the
difference between the two
rates of interest becomes the
main source of profit of the
banks. Most of the
Indian joint stock Banks are
Commercial Banks such as
Punjab National Bank,
Allahabad Bank, Canara
Bank, Andhra Bank, Bank of
Baroda, Thus, we now know how important are commercial
banks in performing the balanced function in an economy. In a parallel
universe, if commercial banks cease to perform these banking functions,
then the economy will collapse out of thirst for money liquidity. Along with
the growth, economic and social stability will be shattered completely.