Depreciation being a non cash item in the financial statements of an entity is shown as an expense in Statement of Profit or loss. Depreciation means decrease in the value of the asset over a period of time with its usage, normal wear and tear loss, change in technology, and change in taste, change in fashion and due to obsolescence. Depre
ciation is charged as expense over life of an asset and creates material impact on the financial results of an entity.
For calculating the correct amount of depreciation to be charged as expense in the first year of an asset life, below are the information required by financial expert:-
- Asset Cost/ Purchase Cost of Asset – The purchase cost of asset as per AASB 116 is the amount paid or incurred for acquiring the asset, putting the asset at the place where it has been use, and for making it ready for usage. It all includes all incidental costs incurred for asset which includes taxes paid on purchase of asset, the freight for bringing the asset to its location, insurance expense incurred for safeguarding the asset from loss, testing and production run expense. And for self generated or constructed asset, the cost of asset includes all the costs incurred for making the asset available for usage (Li, 2016).
- Estimated Life of Asset – According to Corporation Act, 2001 and AASB, estimated life of a particular class of assets has already been defined. Ever entity governing from these laws should have use the defined estimated life in calculation of depreciation. The management of the company can not deviate from the life already defined. If the management wants to use different life then this fact of deviation from statute should be reported in the Notes to Accounts of the financial statements. The estimated life impact the rate of depreciation calculated because if we take more years then rate of depreciation are less or vice versa. Thus, estimated life of an asset have direct impact on the amount of depreciation of asset when is has been calculated over its depreciable life.
- Residual Value of an Asset – Residual value of an asset is also called salvage value of asset or scrap value which implies the estimated or expected value or amount which the asset will fetch after its estimated useful life. The residual value as per financial accounting has major impact on the calculation of depreciation and its rate as it will be subtracted from cost of an asset to get the depreciable amount of asset which is depreciated. The amount residual value is calculated by management of an entity on their past experience, professional judgment and on their discretion and it depends upon the open market condition in which the asset will be disposed off by the company. The residual value is most important factor which has been consider by the management in calculation of depreciation for first year as it directly relates to rate of depreciation to be used (Rus, 2016).
Accordingly, the above three are the basic requirements which are taken into consideration by financial accounting expert of an entity for calculating depreciation for first year and for future years.
Li, W.C., (2016), “Depreciation of business R&D capital “. National Bureau of Economic Research (No. w22473).
Rus, L., (2016), “Accounting, analysis and auditing of information regarding tangible assets in the romanian economic entities.” Annales Universitatis Apulensis: Series Oeconomica, 18(2), p.86.
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