What is Depreciated Cost
Depreciated cost is the remaining cost of an asset after deducting the asset’s original cost by the accumulated depreciation. Understanding the concept of a depreciation schedule and the depreciated cost is important for both accounting and valuation purposes.
- The depreciated cost of an asset is the useful value remaining after the asset’s been depreciated for a certain period.
- The depreciated cost equals the net book value if the asset is not written off for impairment.
- The depreciated cost of an asset is determined by the depreciation method applied.
Depreciation and Depreciated Cost
In accounting, depreciation is a process of allocating the cost of a physical asset over the asset’s useful life. It can be applied to tangible assets, of which the values decrease as they are used up. Buildings, vehicles, computers, equipment, and computers are some examples of depreciable assets.
The fixed tangible assets typically come with a high purchase cost and a long life expectancy. Reporting the costs fully to a single accounting period cannot reflect a company’s financial health accurately. Thus, the IFRS and the GAAP allows companies to allocate the costs over several periods through depreciation.
The depreciated cost of an asset is the value remained after the asset’s been depreciated for a certain period of time. It will be equal to the net book value or the carrying value of an asset if there is no impairment or other write-offs on that asset. At the end of its useful life, an asset’s depreciated cost will be equal to its salvage value.
The depreciated cost can be used as an asset valuation tool to determine the useful value of an asset at a specific point in time. It can be compared with the market value to examine whether there is an impairment to the asset. If an asset is sold, the depreciated cost can be compared with the sales price to report a gain or loss from the sale.
Calculation of Depreciated Cost
The depreciated cost of an asset can be calculated by deducting the acquisition cost of the asset by the accumulated depreciation. The formula is shown below:
The acquisition cost refers to the overall cost of purchasing an asset. Besides the purchase price, it also includes the shipping cost, sales taxes, installation fees, testing fees, and other costs.
Accumulated depreciation is the cumulation of the values that have been depreciated up to a single point in time. It is a contra account of assets and is equal to the sum of all the previous depreciation expenses.
Depreciated Cost and Depreciation Expense
Although the two terms look similar, depreciated cost and depreciation expense come with very different meanings and should not be confused with one another. The depreciation expense refers to the value depreciated during a certain period. It is reported in the income statement.
The accumulated depreciation is equal to the sum of the incurred depreciation expenses. Thus, the depreciated cost can also be calculated by deducting the sum of depreciation expenses from the acquisition cost.
For example, a manufacturing company purchased a machine at the beginning of 2017. The purchase price of the machine was $100,000, and the company paid another $10,000 for shipment and installation. The overall acquisition cost was $110,000 ($100,000 + $10,000).
If the machine’s life expectancy is 20 years and its salvage value is $15,000, in the straight-line depreciation method, the depreciation expense is $4,750 [($110,000 – $15,000) / 20].
Thus, at the end of 2019, the accumulated depreciation is $14,250 ($4,750 * 3), and the depreciated cost is $95,750 ($110,000 – $14,250).
At the end of the useful life of the asset, the accumulated depreciation will be $95,000 ($4,750 * 20). The depreciated cost will be $15,000 ($110,000 – $95,000), equal to the salvage value.
The depreciated cost of an asset is determined by the depreciation schedule that a company applies to the asset. There are several methods of depreciation, which may lead to changing speeds of depreciation, as well as different depreciation expenses for each period. Thus, the depreciated cost will also differ under different depreciation methods.
1. Straight-Line Method
The most common depreciation method is the straight-line method, which is used in the example above. The cost available for depreciation is equally allocated over the asset’s life span. As the depreciation expense is constant for each period, the depreciated cost decreases at the constant rate under the straight-line depreciation method.
2. Declining-Balance Method
The declining-balance method is an accelerated depreciation method. An asset is depreciated faster with higher depreciation expenses in the earlier years, compared with the straight-line method.
Thus, the depreciated cost decreases faster at first and slows down later. The double declining-balance depreciation is a commonly used type of declining-balance method.
3. Sum-of-the-Year’s-Digits (SYD) Method
Similar to the declining-balance method, the sum-of-the-year’s method also accelerates the depreciation of an asset. The asset will lose more of its useful value during the early periods of its lifespan.
4. Units-of-Production Method
The units-of-production method depreciates equipment based on the work that it’s done. The more units produced by the equipment, the greater amount the equipment is depreciated, and the lower the depreciated cost is.
CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: