Depreciated Cost: In-Depth Definition
Depreciated cost (depreciated value), also called net book value, refers to the value of a fixed asset after subtracting accumulated depreciation from its original cost. Depreciation is the process of allocating the cost of an asset over its useful life, and the depreciated cost indicates the current worth of the asset as reflected in accounting records.
Examples:
Office Equipment: If a company buys office equipment for $10,000 and expects it to last for 10 years, using straight-line depreciation, the depreciated cost after 3 years would be $7,000 ($10,000 - (3 x $1,000)).
Machinery: A manufacturing company purchases machinery for $50,000 with a useful life of 5 years. Using the sum-of-the-years’-digits method, the depreciated cost after 2 years might be $20,000, depending on the calculated depreciation for each year.
Frequently Asked Questions (FAQs):
1. How is depreciated cost calculated?
Depreciated cost is calculated by subtracting the accumulated depreciation from the asset’s original cost.
2. What methods are used to compute depreciation?
Common methods include straight-line, declining balance, and sum-of-the-years’-digits depreciation.
3. Does depreciated cost indicate the market value of an asset?
No, depreciated cost reflects the book value of an asset for accounting purposes and does not necessarily represent its current market value.
4. How does depreciated cost affect financial statements?
Depreciated cost impacts the balance sheet by reducing the book value of assets and the income statement by reflecting depreciation expense.
5. Is depreciated cost relevant for tax calculations?
Yes, depreciated cost is used to determine depreciation expense, which can be deducted for tax purposes.
Related Terms:
- Depreciation: The systematic reduction in the recorded cost of a fixed asset.
- Accumulated Depreciation: The total depreciation expense charged against a fixed asset since it was acquired.
- Book Value: The net value of an asset according to balance sheet accounts, calculated as the original cost minus accumulated depreciation.
- Asset: A resource owned by a business with economic value.
- Useful Life: The period over which an asset is expected to be usable for its intended purpose.
Online Resources:
- Investopedia: Comprehensive articles on financial and accounting terms.
- IRS.gov: Regulations regarding depreciation and tax implications.
- Accounting Tools: Detailed explanations and accounting best practices.
Suggested Books for Further Studies:
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Financial Accounting: An Introduction to Concepts, Methods and Uses” by Clyde P. Stickney, Roman L. Weil, Katherine Schipper, and Jennifer Francis
- “Managerial Accounting” by Ray H. Garrison, Eric W. Noreen, and Peter C. Brewer
- “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper
- “Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Reports” by Howard Schilit