Original Cost of Asset
This is the cost of the asset. It is also known as historical cost. It includes :
- Purchase price of the asset
- Freight inwards for purchasing the asset
- Cost of installation cost
- Any other cost for bringing the asset to its present location or condition
Example – Below cost details are with regard to purchase of a machinery :
- Purchase Price (Invoice price) – Rs 5 Lakhs
- Freight incurred – Rs 50 thousand
- Cost of engineer hired for installation – Rs 25 thousand
- Total cost of machinery – Rs 5 Lakhs 75 thousand
Note : Any refundable taxes are not included in the cost
Estimated Residual Value or Scrap value
Amount estimated to be realised at the end of useful life of the asset by selling it as scrap
Useful Life of asset
It is also known as economic life. It means the estimated period over which the asset is expected to be used. This is just an estimate for the purpose of providing the depreciation and the actual life of asset may come out to be higher or lower than the estimated useful life.
If the law governing the business entity specifies certain provisions for providing depreciation then such provisions are to be necessarily followed. Example – Income Tax Laws, Company Laws
Depreciation in year of purchase
In the year of purchase the depreciation to be provided only for the period for which the asset is used and not necessarily for the full year. Suppose an asset is purchased on 01-Aug then depreciation will be provided only for 8 months i.e number of months from August (Month of purchase) to March (financial year end)
Depreciation in last year
In the financial year when the asset is scrapped or disposed , if it is not used for the full financial year then depreciation will be provided only till the date of disposal. Example suppose a machinery is disposed in November. Then depreciation for this year will be provided from April to November i.e. for 8 months
Book Value of Asset
Book Value of Asset is also known as written down value of asset. It is the value as shown in the books of accounts after providing depreciation till date.
Book Value of asset = Cost price of asset – Depreciation provided for all the years from the date of purchase till now
Other Points for solving questions (Not relevant for practical usage in real life situations)
- If rate of depreciation given without the words per annum then depreciation should be provided at that rate irrespective of purchase or sale between the year. Consider the two different scenarios below :
- Case 1 – A machinery purchased on 01-Sep for Rs 5 Lakhs. Depreciation to be provided @ 15%. Calculate Depreciation.
- Case 2 – A machinery purchased on 01-Sep for Rs 5 Lakhs. Depreciation to be provided @ 15% per annum. Calculate Depreciation.
- Answer Case 1 – Depreciation will be 500000*15/100 = 75000
- Answer Case 2 – Depreciation will be 500000*15/100*7/12 = Rs 43750. Note in this case depreciation calculated for 7 months only as the depreciation rate given in question is for the year
- If date of acquisition is not given in question then depreciation is calculated for the full year assuming that the asset is purchased at the beginning of the year