Cost of Assets for Calculating Depreciation

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Introduction

Generally, when we talk about the cost of any particular asset, we tend to naturally think about the monetary aspects of the asset. However, the cost of assets for calculating depreciation includes several other key attributes as well, other than only money. As a result, there are numerous depreciation calculation methods used to analyse these costs. These costs, therefore, include several other components such as cost price, duties, handling expenses, among others. 

Therefore, through the ways of this article, these methods shall be discussed with respect to the cost of assets and more specifically the accumulated depreciation formula, among others. 


Depreciation Calculation Methods

With regards to calculating the decrease of the value of a company’s assets in a market, there are four primary methods that are used, namely: Straight Line Depreciation, Units of Production Depreciation, Sum of the Years’ Digits Depreciation and Declining Balance Depreciation. Each of these methods serves a distinct purpose whether with regards to calculating depreciation expense or something else. 

Therefore, these methods exist to carry out a number of depreciation formula accounting practices among firms and businesses in terms of their operations. Therefore, the formulas that are used in order to calculate the depreciation of an asset’s value in a market vary differently with the kind of method that is being used to calculate. 

As a result, the depreciation calculation formula is different for different methods. Three of the formulas are:

Straight-Line Depreciation Method= \[\frac{\text{Cost of Asset - Residual Value}}{\text{Useful Life of a Particular Asset}}\]


Diminishing Balance Method= \[\frac{\text{Cost of Asset * Rate of Depreciation}}{\text{100}}\]


Unit of Product Method = \[\frac{\text{Cost of Asset - Salvage Value}}{\text{Useful Life in the Form of Produced Units}}\]


As can be understood, there is no universal depreciable value formula which can be used to calculate the depreciation of an asset’s cost over time. And, similar to this, there are other important aspects to depreciation as well, such as accumulated depreciation, depreciable cost and others. 


Accumulated Depreciation Formula 

In order to calculate accumulated depreciation of a company’s assets, the salvage value or the estimated scrap is subtracted from the asset’s initial cost. Therefore, through the proper implementation of this formula, the accumulated depreciation of an asset’s value in a market is determined. 

Therefore, the formula for the accumulated depreciation of an asset’s value is:

\[\frac{\text{Cost of Asset - Salvage Value}}{\text{ Life of Asset}}\] * Numbers of Years


Depreciable Cost

While discussing the assets of depreciation calculation, the facet of depreciable cost plays a big role. Defined as an asset’s cost which is susceptible to be depreciated with time it is, in effect, the same as the asset’s acquisition cost, without its salvage value. 

Therefore, the Formula for the Depreciable Cost is:  Original Cost- Salvage Value


Book Value Formula Depreciation 

While discussing assets for depreciation calculation in a stable marketplace, it is imperative to discuss the book value of the asset. The book value is defined as the value of an item (asset) after the depreciation of the asset has been accounted for. Therefore, the significance of the book value of an asset lies with the asset’s allowance of depreciation over time. Similarly, the book value is a significant indicator of a business’s depreciation values and how much of them can be written off on the taxes of the business. Therefore, the book value of an asset is highly dependent on its ability to attract investors. 

 

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FAQ (Frequently Asked Questions)

1. What is the Depreciation Calculation as per Companies Act?

Ans. In 2013, The Companies Act was put into use in order to facilitate businesses to keep track of the standards by which assets depreciate in their perceived values at any particular market. The Companies Act made companies more aware of the standards that are followed and catered to at a market with respect to the value of their assets. The calculation that is done with regards to the depreciation of value is mandated by this act, although companies may decide to not obey the act since disclosure of asset values of a company is not always considered an ethical practice. 

2. How does the Depreciation Calculator Real Estate Operate?

Ans. Since real estate is an especially significant facet when it comes to the aspect of calculating depreciation, the process involves the deduction of costs from the taxes paid by the buyer. Therefore, the taxable income is lowered in the process of real estate cost depreciation. Through this process, therefore, the value of the asset, i.e., the building(s) gets depreciated while the value of the land remains the same. Since real estate is highly likely to fluctuate at any given time period, the depreciation allowance plays out significantly differently in this industry as opposed to other industries in the market. 

3. How does the Depreciation Calculation for Car Work?

Ans. Since it is a known fact that the value of cars depreciate as time passes, with the presence of very few exceptions, the primary reason for its drastic depreciation in value over time is attributed to the mere fact that a car in its new condition is a perfect machine, but with time its parts begin to age and with strain, its value gets depreciated. Similarly, the same applies to the car’s various parts, and according to the condition of the parts, the value gets determined at a market, just like every other machine whose value fluctuates with respect to its parts and age.