Depreciable Cost: What Does Depreciable Cost Mean?
The depreciable cost is the cost of an asset that can be depreciated over time. It is equal to acquisition cost of the asset, minus its estimated salvage value at the end of its useful life.
The cost of the asset includes the asset’s purchase price along with the cost incurred to put the asset into use such as repairs, upgrades, sales taxes, customs duties and on-site modifications.
What this article covers:
What Is Depreciation?
In accounting, depreciation is a method of reducing the recorded cost of a fixed asset in a systematic manner until the value of the asset becomes zero or when it’s sold.
This is required under the matching principle of GAAP and is done to match the cost of the fixed asset over its productive life to the profits the business earns from the asset. This provides a complete picture of the revenue generation transaction.
The examples of depreciable assets include tangible assets such as equipment, machinery, building and furniture. Businesses depreciate assets for both tax and accounting purposes.
What Is Depreciable Value?
The depreciable value of the asset is the combined cost of purchase and installation of an asset that can be depreciated minus its salvage value. For example, an asset has a cost of $20,000. At the end of its useful life, you expect to sell it off for $3000.
The depreciable value of this asset is $17,000 ($20,000 – $3000)
To calculate the annual depreciation, you must divide the depreciable value by the useful life of the asset. For example, if the depreciable value of the asset is $17,000 and useful life is 10 years, then the assets recognize a cost of $1,700 every year for the next ten years.
There are three main inputs needed to calculate the depreciable costs. They include:
The cost of the asset: This includes the purchase price, taxes, shipping and the setup expenses of making the assets available for use.
Salvage value of asset: Once the useful life of the fixed asset is over, the business may sell it at a reduced price. This is known as the salvage value of the asset.
What Are Depreciation Costs?
Depreciation costs, also known as net book value, is the cost of an asset less accumulated depreciation.
Depreciation cost = Purchase price of an asset – Cumulative depreciation
Depreciation expense or depreciation costs is the amount of depreciation that is reported on the income statement. It’s allocated portion of the cost of the fixed assets of a business that is appropriate for the accounting period
The depreciation costs are noncash business expenses. This is because the recurring, monthly entry of these costs does not involve any cash transaction. Instead, the monthly depreciation value debited to the depreciation expense and credited to accumulated depreciation.
At the end of the year, the accumulated depreciation for the year is shown on the financial statements, along with the initial cost.
Calculating and recording the depreciable costs allows businesses to maintain their income statement and balance sheet properly with the right profits recorded.