What is Depreciated Cost?
Depreciated Cost of an asset is its value after charging total depreciation to date that has been accrued. Thus, it represents the remaining value of an asset that has to be utilized over its remaining life.
Depreciated Cost of an Asset can be calculated using the following formula:
Depreciated Cost Formula = Original Cost – Accumulated Depreciation
How to Calculate Depreciated Cost?
To calculate the depreciated cost of an asset, we need to deduct the accumulated depreciationAccumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset's purchase price and its carrying value on the balance sheet. from the original cost of the asset.
Original cost is the cost incurred on the purchase of the asset and other expenses incurred to bring it to working condition. In other words, we can say the original cost means the purchase price of an asset and includes other related expenses incurred on it, like installation expenses.
Accumulated depreciation is the total value of depreciation that has been charged on an asset to date. Depreciation is an expense that is booked against the cost of an asset to reduce the value of the asset to its estimated salvage valueSalvage ValueSalvage value or scrap value is the estimated value of an asset after its useful life is over. For example, if a company's machinery has a 5-year life and is only valued $5000 at the end of that time, the salvage value is $5000. (residual value) throughout its estimated life. Thus by charging depreciation, a company reduces the cost of the asset year by year to ultimately reduce the value to the salvage value at the end of the life of the asset.
Examples of Depreciated Cost
Let us understand this concept using a few examples.
A company had purchased a piece of equipment for $2,000 in the year 2012. The company charged depreciation of equipment is $400 till the year ending 2018.
Calculation of Depreciated Cost
- = $2,000 – $400
- = $1,600
Here, the company had charged a total depreciation of $400 from the year 2012 till the year 2018. The same reflects the accumulated depreciation on the equipment. On the other hand, the company had purchased the equipment for a total cost of $2,000. Thus, at the end of the year 2018, depreciated value comes out $1,600 after reducing the accumulated depreciation of $400 from the original cost of $2,000.
A company had purchased a piece of machinery in the year 2015 and incurred the following expenses on its acquisition.
- Cost Price: $3,200
- Conveyance: $10
- Installation Charges: $50
- Depreciation charged by the company till the end of the year 2018 amounted to $300.
Let us calculate the original cost first.
Original Cost = Cost Price + Conveyance + Installation Charges
- = $3,200 + $10 + $50
- Original Cost = $3,260
Calculation of Depreciated Cost
Here, the company had charged a total depreciation of $300 from the year 2015 till the year 2018. The same reflects the accumulated depreciation on the machinery. On the other hand, the company had incurred a total expense of $3,260 in relation to the purchase of the machinery. Thus, at the end of the year 2018, the depreciated value comes out to be $2,960 after reducing the accumulated depreciation of $300 from the original cost of $3,260.
Relevance and Use
The depreciated cost of an asset reflects its residual value, i.e., that part of the cost that is yet to be utilized over the remaining life of the asset. It helps a company to present its assets in the books of account at its current cost value. This concept allows decreasing the cost of the asset over its useful life. It is important to note that this formula represents the book value of the assetBook Value Of The AssetBook Value of Assets is the asset's value in the books of records of a company or an institution at any given instance. Assets Book Value Formula = Total Value of an Asset – Depreciation – Other Expenses Directly Related to it and not the market value.
The gains on the sale of the asset can be calculated by comparing the selling price against the depreciated cost. The resulting difference will be gain or loss on the sale of the asset.
The depreciated cost of an asset represents the remaining value of the asset that is to be amortized over its remaining life. Also, the fair value is different from the depreciated cost, and the fair value of an asset may be more than the carrying amountCarrying AmountThe carrying amount or book value of asset is the cost of tangible, intangible assets or liability recorded in the financial statements, net of accumulated depreciation or any impairments or repayments. Accordingly, the carrying amount may differ from the market value of assets. of an asset.
This article has been a guide to Depreciated Cost. Here we discuss the calculation of depreciated cost along with practical examples and downloadable excel template. You can more about finance from the following articles –