This article mentions the three important factors to consider when determining the amount of depreciation to be charged to the profit and loss account in respect of a particular asset. The cost of the asset includes the invoice price of the asset less any trade discount, in addition to all costs that were essential to bring the asset to a useable condition. For example, if a machine is purchased for $10,000 with $2,000 in freight charges and $3,000 in installation charges, the cost of the machine for the purpose of depreciation should be taken as $15,000, (i.e., $10,000 + $2,000 + $3,000). It should be noted that financial charges such as interest on money borrowed for the purchase of the asset should not be included in the cost of the asset. Scrap value is the residual or salvage value that is expected to be realized after the sale of an asset at the end of its useful life. In determining the scrap value, the cost to be incurred in the disposal or removal of the asset should be deducted from the total realizable value. Estimated useful life is also known as the economic life of the asset. It can be calculated in terms of years, months, hours, units of output, or other operating measures (e.g., kilometers in the case of a taxi or truck).1. Cost of the Asset
2. Estimated Scrap Value
3. Estimated Useful Life
Factors Affecting the Amount of Depreciation FAQs
Depreciation is the process of allocating the cost or a portion of the cost of an asset over a period. Amortization, on the other hand, is an accounting method that allocates costs over a limited number of years—regardless of whether those costs are for finite expenditures such as rent and insurance premiums or intangible expenses.
The three important factors to consider when determining the amount of Depreciation to be charged to the profit and loss account in respect of a particular asset are: (i) cost of the asset(ii) estimated scrap value (iii) estimated useful life
The cost of the asset includes the invoice price of the asset less any trade discount, in addition to all costs that were essential to bring the asset to a useable condition.
Scrap value is the residual or Salvage Value that is expected to be realized after the sale of an asset at the end of its useful life. In determining the scrap value, the cost to be incurred in the disposal or removal of the asset should be deducted from the total realizable value.
Estimated useful life is also known as the economic life of an asset. It can be calculated in terms of years, months, hours, units of output, or other operating measures (e.G., Kilometers in the case of a taxi or truck).
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
