Factors affecting the amount of depreciation Measurement

Factors affecting the amount of depreciation Measurement:-

Following factors require to be considered for calculating depreciation.

(1) Cost of assets

(2) Estimated useful life of asset.

(3) Estimated scrap value (if any) at the end of useful life of asset.

(1)      Cost of  property plant and equipment (Fixed assets):-

 (a)      Purchase price of assets including non-refundable import duties and purchase taxes, after deducting trade discounts and rebates.

(b)     Any cost directly attributable to bring the asset to the location and condition necessary for it to be capable of operating in a manner intended by the enterprise.

(c)      The initial estimate of the costs of dismantling, removing the item and restoring the site on which asset is located.

 Examples of costs directly attributable to costs are:

(a)      Cost of employees benefits arising directly from acquisition or construction of an item of property, plant and equipment.

(b)     Cost of site preparation

(c)      Initial delivery and handling costs

(d)     Installation and assembly costs

(e)      Cost of testing whether the asset is functioning properly.

(f)       Professional fees e.g. engineers hired etc.

Following expenses should not become part of the cost of asset:

(a)      Cost of opening new facility or business, such as inauguration costs,

(b)     Cost of introducing new product or service( for eg cost of advertisement or promotional activities)

(c)      Cost of conducting business in a new location or with new class of customers( including cost of staff training)

(d)     Administration and other general overheads costs.

2. Useful life:-The period over which depreciable assets is expected to be used by enterprises.

The total number of units expected to be produced or obtained from use of asset of enterprises.

3. Scrap value:- Determination of scrap value is matter of estimation based on many factors. If its value is not significant then it is not considered, if its value is significant its value is considered for charging depreciation at the time of acquisition/installation or at the time of subsequent revaluation of assets.

Demo Classes of Accounts (CA/CMA/CS/B.Com/11-12th) by CA/CMA Santosh Kumar Sir

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