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+1-802-778-9005Depreciable costs are the total cost of an asset that can be depreciated over time. Businesses and individuals use this method to determine an asset’s useful value.
Depreciable cost is the total depreciation that an asset has to bear over its useful life, leaving the salvage value in the end. It can also be the sum of the asset’s accumulated depreciation over its useful life.
The depreciable value of an asset is the total cost of purchasing and installing a depreciable asset minus its salvage value. For example, suppose an item costs $20,000. You intend to sell it for $3000 when it has served its purpose.
The depreciable value of this asset is $17,000 ($20,000 minus $3000).
To calculate annual depreciation, divide the depreciable value by the asset’s useful life. For example, if the asset’s depreciable value is $17,000 and its useful life is ten years, the assets will incur a cost of $1,700 per year for the next decade.
There are three key inputs needed to calculate depreciable costs. They include:
The Cost of the Asset: The cost of the asset includes the purchase price, taxes, shipping, and setup expenses for making it available for use.
Asset Salvage Value: When a fixed asset reaches the end of its useful life, the corporation may sell it for a discount. This represents the asset’s salvage value.
Let’s say a company buys a delivery truck for $50,000. The truck is expected to be used for 5 years, after which it will have a salvage value of $5,000.
| Financial Metric | Amount (in dollars) |
| Purchase Price | $50,000 |
| Salvage Value | $5,000 |
| Useful Life | 5 Years |
Depreciable Cost=50,000−5,000=45,000\text{Depreciable Cost} = 50,000 – 5,000 = 45,000Depreciable Cost=50,000−5,000=45,000
Thus, the depreciable cost of the delivery truck is $45,000, which will be spread over its 5-year useful life.
If you have the initial purchase price (which also includes the installation price) and the salvage value, then you can directly calculate the depreciable cost using the formula.
If you do not yet have the salvage value but you have the rate of depreciation, you can use any method of depreciation to calculate the asset’s annual depreciation and then add all the accumulated depreciation from the first year of the purchase until the last useful year to determine the depreciable cost.
Some of the most common depreciation methods are:
Depreciable Cost Formula = Purchase Cost – Salvage Value
where;
The depreciable cost of a fixed asset is the total value of the asset that can be depreciated throughout its estimated useful life.
The depreciable cost is derived by subtracting the fixed asset’s acquisition cost from its assumed salvage value.
All else being equal, a higher depreciable cost, combined with a shorter usable life assumption and lower salvage value, results in a larger yearly depreciation expense being recognized on the income statement.
Step 1: Determine the Asset’s Initial Cost
This will include the price of the asset along with all the costs associated with setting the service into use.
Step 2: Estimate the Salvage Value
This will include the amount the company expects to recover when the asset is sold or scrapped.
Step 3: Subtract the salvage value from the asset’s initial cost
Now, subtract the estimated salvage value from the cost of the asset to find the depreciable amount.
Happy Private Limited purchases machinery. The machinery’s salvage value is $5,000, and its useful life is 5 years. Its purchase price is $25,000.
Solution:
Given:
Depreciable Cost = Purchase Cost – Salvage Value
= $ 25,000 – $ 5,000
= $ 20,000
Depreciable cost is a crucial concept for businesses as it allows accurate allocation of an asset’s cost over its useful life, expenses, and revenue generation. Businesses need to exercise caution in their judgments related to an asset’s useful life, salvage value, and depreciation method, as these decisions will have an impact on the company’s financial records.
