Depreciation refers to the process of allocating the cost of a tangible asset over its useful life. Various key concepts are involved in understanding depreciation, each affecting how depreciation is calculated and recorded.
1. Depreciable Base:
The depreciable base is the total amount of an asset that can be depreciated. It is calculated by subtracting the salvage value (residual value) from the asset’s original cost. The depreciable base represents the portion of the asset’s cost that will be spread over its useful life.
Formula:
Depreciable Base = Cost of the Asset − Salvage Value
2. Salvage Value (Residual Value):
Salvage value is the estimated amount that an asset will be worth at the end of its useful life. It is the estimated scrap or residual value that can be recovered after the asset is disposed of or sold. The salvage value is subtracted from the cost of the asset to determine the depreciable base.
Example: If a car is purchased for ₹500,000, and after 10 years, it is expected to be sold for ₹50,000, the salvage value is ₹50,000.
3. Basket Purchases:
Basket purchases refer to acquiring a group of assets as a single package or “basket.” This often occurs when an entity buys several assets at once for a single price, such as land, buildings, and machinery. The total cost of the basket purchase is then allocated to each individual asset based on its relative fair market value.
How It Works:
- The total purchase price is divided among the individual assets based on their respective values.
- Depreciation is then calculated for each asset separately.
4. Group Depreciation:
Group depreciation is the method used to depreciate a collection of assets together as a group. This method is used when multiple assets are acquired together, and they are similar in nature and have a similar life span. Instead of calculating depreciation individually for each asset, the entire group is depreciated using a common rate.
How It Works:
- The total cost of the group of assets is calculated.
- Depreciation is then calculated for the group based on a single depreciation rate applied to the total cost or total depreciable base of the group.
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