depreciable cost

(noun)

original cost minus salvage value

Related Terms

Examples of depreciable cost in the following topics:

  • Methods of Depreciation

    • The Modified Accelerated Cost Recovery System (MACRS) is the current tax depreciation system used in the United States .
    • The straight-line formula used to calculate depreciation expense is: (asset's historical cost - the asset's estimated salvage value) / the asset's useful life.
    • Under this method, annual depreciation is determined by multiplying the depreciable cost by a series of fractions based on the sum of the asset's useful life digits.
    • Apply the rate to the book value of the asset (cost subtracted by accumulated depreciation) and ignore salvage value.
    • Under MACRS, the capitalized cost (basis) of tangible property is recovered by annual deductions for depreciation over a specified life.

  • What Is Depreciation?

    • Depreciation is defined as the expensing of the cost of an asset involved in producing revenues throughout its useful life.
    • Depreciation for accounting purposes refers the allocation of the cost of assets to periods in which the assets are used (depreciation with the matching of revenues to expenses principle).
    • Depreciation expense also affects net income.
    • Generally the cost is allocated as depreciation expense among the periods in which the asset is expected to be used.
    • A depreciation method commonly used to calculate depreciation expense is the straight line method.

  • Factors for Calculating Depreciation

    • There are four main factors that affect the calculation of depreciation expense: asset cost, salvage value, useful life, and obsolescence.
    • So, companies can choose a method that allocates asset cost to accounting periods according to benefits received from the use of the asset.
    • The most important criteria to follow: Use a depreciation method that allocates asset cost to accounting periods in a systematic and rational manner.
    • The depreciation expense is reported on the income statement as a reduction to revenues and accumulated depreciation is reported as a contra account to its related Delivery Truck asset account (reduces the asset's cost to its book value) on the balance sheet.
    • Next, apply the resulting double-declining rate to the declining book value of the asset (cost subtracted by accumulated depreciation).

  • Impact of Depreciation Method

    • The depreciation expense is reported on the income statement as a reduction to revenues and accumulated depreciation is reported as a contra account to its related Delivery Truck asset account (reduces the asset's cost to its book value).
    • Sum-of-years-digits depreciation is determined by multiplying the asset's depreciable cost by a series of fractions based on the sum of the asset's useful life digits.
    • However, revenues may be impacted by higher costs related to asset maintenance and repairs.
    • Next, apply the resulting double-declining rate to the declining book value of the asset (cost subtracted by accumulated depreciation).
    • The depreciation method used to depreciate a car calculates an expense that reduces income.

  • Cost of Buildings

    • The cost of a building is its original purchase price or historical cost and includes any other related initial costs.
    • Unlike land, buildings are subject to depreciation or the periodic reduction of value in the asset that is expensed on the income statement and reduces income.
    • Since buildings are subject to depreciation, their cost is adjusted by accumulated depreciation to arrive at their net carrying value on the balance sheet.
    • For example, on Acme Company's balance sheet, their office building is reported at a cost of $150,000, with accumulated depreciation of $40,000.
    • The cost of a building can include construction costs and other costs incurred to put the building into use.

  • Reporting Assets

    • A business must report an asset's acquisition cost, how it is depreciated, any subsequent expenditures tied to it, and how it is disposed.
    • Costs associated with fixing used property so it can be used by the company are included in the acquisition costs.
    • Unnecessary costs associated with initially transporting the property to where it needs to go is not included in the acquisition cost.
    • The first is the cost of the asset.
    • The most common depreciation method type is "straight-line," where the depreciation rate is calculated by subtracting the asset's residual value from its acquisition cost and dividing the result by its useful life.

  • Cost of Improvements

    • The cost of an asset improvement is capitalized and added to the asset's historical cost on the balance sheet.
    • The cost of the improvement is capitalized and added to the asset's historical cost on the balance sheet.
    • Since the cost of the improvement is capitalized, the asset's periodic depreciation expense will be affected, along with other factors used in calculating depreciation.
    • When the cost of a capital improvement is capitalized, the asset's historical cost increases and periodic depreciation expense will increase.
    • The change in periodic depreciation expense also can be impacted by the method used to calculate depreciation and may also have federal income tax consequences.

  • Reporting R&D Cost

    • Expense R&D, unless items have alternative future uses, then allocate as consumed, or capitalize and depreciate as used.
    • R&D costs may be expensed.
    • The capital expenditure costs are then amortized or depreciated over the life of the asset.
    • In this case, the contract usually specifies that all direct costs, certain specific indirect costs, plus a profit element, should be reimbursed to the enterprise performing the R&D work.
    • The costs associated with R&D activities and the accounting treatment accorded them are as follows: expense the entire costs, unless the items have alternative future uses (in other R&D projects or otherwise), then carry as inventory and allocate as consumed, or capitalize and depreciate as used.

  • Cost of Equipment

    • The cost of equipment is the item's purchase price, or historical cost, plus other initial costs related to acquisition and asset use.
    • Equipment is subject to depreciation.
    • Depreciation is a periodic reduction in an asset's value.
    • The cost is then reduced by accumulated depreciation to arrive at a net carrying value or net book value.
    • A company is free to decide what depreciation method to use on the equipment.

  • Adjustments

    • Depreciation @ $20/monthAccumulated Depreciation 20, Depreciation Expense 20; Assets(-)=Equity(-)Augusta.
    • Depreciation @ $20/monthAccumulated Depreciation 20, Depreciation Expense 20; Assets(-)=Equity(-)c.
    • Depreciation on studio equipment (500 for 25 months = 20/month)Depreciation expense 20 Accumulated Depreciation 20c.
    • Based on this, revenues and associated costs are recognized in the same accounting period.
    • Inventory - in a periodic inventory system, an adjusting entry is used to determine the cost of goods sold expense.