Explain determinants of the amount of depreciation.
Explain determinants of the amount of depreciation.
The determination of depreciation depends on three parameters, viz cost, estimated useful life and probable salvage value.
(i) Cost of Asset includes invoice price and other costs, which are necessary to put the asset in use or working condition. Besides the purchase price, it includes freight and transportation cost, transit insurance, installation cost, registration cost, commission paid on the purchase of asset items such as software etc. In case of purchase of a second-hand asset, it includes initial repair cost to put the asset in workable condition. In such condition, repair also become capital expenditure.
(ii) Estimated Useful Life Useful life of an asset is the estimated economic or commercial life of the asset. Physical life is not important for this purpose because an asset may still exist physically but may not be capable of commercially viable production.
(iii) Estimated Net Residual Value Net residual value (also known as Scrap value or Salvage value for accounting purpose) is the estimated net realisable value (or sale value) of the asset at the end of its useful life. The net residual value is calculated after deducting the expenses necessary for the disposal of the asset.
The determination of depreciation depends on three parameters, viz cost, estimated useful life and probable salvage value.
(i) Cost of Asset includes invoice price and other costs, which are necessary to put the asset in use or working condition. Besides the purchase price, it includes freight and transportation cost, transit insurance, installation cost, registration cost, commission paid on the purchase of asset items such as software etc. In case of purchase of a second-hand asset, it includes initial repair cost to put the asset in workable condition. In such condition, repair also become capital expenditure.
(ii) Estimated Useful Life Useful life of an asset is the estimated economic or commercial life of the asset. Physical life is not important for this purpose because an asset may still exist physically but may not be capable of commercially viable production.
(iii) Estimated Net Residual Value Net residual value (also known as Scrap value or Salvage value for accounting purpose) is the estimated net realisable value (or sale value) of the asset at the end of its useful life. The net residual value is calculated after deducting the expenses necessary for the disposal of the asset.
