Depreciable Basis: Definition

Depreciable basis is the asset acquisition cost less its estimated residual value.

Depreciable Basis: Explanation

The total amount of depreciation that should be recorded in an asset’s life is called its depreciable basis. The amount is the difference between the value of the asset at the beginning of its life (cost) and its estimated value at the end of its life (salvage value).

The use of estimated salvage value is not well established in practice. In fact, a major survey revealed that 59% of companies simply assume a salvage value of zero.

Three reasons cited for this assumption were the lack of materiality, the inability to estimate salvage value with reliability, and the fact that salvage value can usually be ignored for tax purposes.

If an estimate needs to be made, information concerning its amount is available from the firm’s prior experience, manufacturers, or trade associations of users.

Frequently Asked Questions

What does depreciable basis mean?

As per accounting rules, Depreciation of assets is to be booked on the basis of the purchase price (less any trade discounts) and estimated residual value. The book value at the end of the life of an asset is called its depreciable basis.

What are some examples of depreciable basis?

Examples include, but are not limited to: -machinery and tools -office equipments (computers, phones, etc.) -Vehicles (cars, trucks, etc.) -Buildings (offices, stores, etc.) -Furniture (desks, chairs, etc.)

What are the advantages of a depreciable basis?

The first advantage is that it helps to lower net income. It does this because Depreciation is deducted as an expense against the revenue earned by the company. Secondly, Depreciation helps in matching expenses against revenue over the useful life of assets. This way, all non-cash expenses due to the acquisition and use of assets are matched against corresponding inflows during these periods. This results in improving the financial ratio analysis.

What is the formula for calculating a depreciable basis?

Depreciable basis can be calculated by using any one of the following formulae: i). Depreciable basis = asset acquisition cost – estimated residual value ii). Depreciable basis = (asset acquisition cost + estimated residual value) / estimated useful life of the asset iii). Depreciable basis = (asset purchase price – Salvage Value) / estimated useful life of the asset

What are the disadvantages of a depreciable basis?

This method of Depreciation results in recording higher Depreciation expenses in earlier years of asset life and lower Depreciation expenses in later years. As a result, the tax provision appears higher during the early years of an asset’s life and declines slowly as it gets closer to its residual value over time.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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