Factors Affecting the Amount of Depreciation Video Lecture - Commerce

we move on to measurement of
depreciation what we've understood so
far is that depreciation is a loss in
the value of asset it is a systemic
allocation of the cost of the asset over
the life of the asset so that the cost
is matched with the benefits than the
asset is booked but the benefits that we
get from the asset what is the systemic
allocation of depreciation how much
should be the depreciation in the first
year how much in the second layer how
much in the third year so how is
depreciation for each year measured this
is what we shall discuss when we discuss
measuring depreciation actually there
are different methods of measuring
appreciation we will discuss the more
important ones but what are the factors
which are required in order to measure
appreciation first and foremost the cost
of the asset what is the cost of the s-1
is simply the purchase cost let us say B
I import furniture for my office what
are the costs involved there is the
purchase cost the invoice price there
may be certain custom duties I have to
pay then there is a transportation cost
of bringing the furniture to my office
there may be an unloading cost there may
be a cost of fitting it all these costs
which are incurred there early asset can
actually be used would go to add to the
cost of the asset this is actual we can
compute and all cost incurred all costs
incurred tilly as it can be put to use
would be a part of the cost of the asset
please note maintenance costs
cost of maintaining an asset is not a
part of the cost of the asset insurance
premium paid
etc regular repairs once a machinery has
been installed regular repairs in order
to maintain the Machine maintain the
condition of the machine these are not a
part of the cost of the asset the other
factor is what is called the residual
value the residual value is the value I
expect to get by selling the machine
after using it during its lifetime it is
in a way you can say the scrap fur for
example if I purchase a machinery with a
life of five years and the machine is
purchase for one lakh of rupees at the
end of five years I might be able to get
some five thousand rupees for it if I
send it as correct this five thousand
this crap value is the residual value
the value at the end of the life of the
asset end of the economic life of the
asset this scrap value may be estimated
I am Not sure that I will get 5000
rupees exactly for this it is quite
possible that I get only three thousand
it is also possible that after five
years I might get eight thousand when I
sell the asset therefore this residual
value is estimated it is only an
estimate
next is the useful life I expect this
machine to run for five years but it is
possible that it runs for only four and
a half years it is quite possible that
it runs for seven years so the life the
useful life of the asset is also an
estimate I make based on my experience
my judgment my understanding so these
three factors actually contribute for
measuring depreciation I need to know
the cost of the asset I need to know
what I expect the scrap value of the
residual value to be and I should know
the useful
life of the s what they expected useful
life of the essence
considering all these three I arrived at
what is called a depreciable among the
appreciable amount there is nothing but
cost of asset - the residual value this
is my depreciable amount it is computed
from these three from these two factors
above and what is depreciation this
depreciable amount cost of asset - a
residual value spread over the life of
the asset will give me the appreciation
for each how it is to be spread
shouldn't be spread equally because I
will get benefit equal benefit each year
should it be spread in such a manner
that I get maximum benefit after all
from the ascent in the first year and
therefore maximum depth reishi ation
should go in the first year or should it
be entirely on the basis of the use I
use more therefore more depreciation I
use less I therefore less depreciation
so there are different methods of
computing depreciation of measuring
depreciation first let us just
understand the cost of an asset through
this exercise following data pertaining
to be limited is available cost of the
secondhand plant is one like eighty
thousand cost of repairing the plant is
twenty thousand wages paid for
installation of the plant is five
thousand five inch fire insurance
premium paid for the plant is one
thousand what is the amount to be
debited to the plant account is it a 1
lakh 80,000 B 2 lakhs C tool at five
thousand or D 2 lakh 6000 now before we
look at the answer let us just
understand the scenario so be limited
let us assume is installing a missionary
but this machinery D apparently seems to
have purchased
the secondhand plant for one lakh 18,000
because it is a secondhand plant
he has spent 20,000 on repairing this
plot he will not be able to use this
plant unless these repairs are incur the
cost of this repairing is incurred
therefore this 20,000 becomes a part of
the cost of the asset so you have one
like eighty thousand which is the cost
of the secondhand plant that he has
purchased we have twenty thousand which
he has spent in repairs
I repeat ordinarily after we purchase a
machine and a set and it is put to use
every year we will spend some money on
trying to repair the machine on that is
nothing but a maintenance cost repairs
and maintenance which articles which are
incurred every year on maintaining the
SA is not a part of the cost of an asset
in this case it is taken as a cost of an
asset only because it is required to
bring the asset in a condition that it
can perform that it can function that we
can use the asset so one lakh eighty
thousand plus the cost of incurring
repairing the plant twenty thousand
wages paid for installation without
installation we cannot use the flood
next is five insurance premium which is
paid for the plan fire insurance premium
is paid for maintaining the plant if if
there is a fire and the and the Machine
gets affected gets destroyed I want
money I want my machine replaced and
therefore this cost is nothing but a
cost incurred to maintain the machine it
is not a part of the cost of the
therefore totally one like 80 plus 20
plus 5 2 lakh 5000 should be the cost of
the asset our answer should be C 2 lakh
5,000 cost of the asset let's
now move on and understand add
appreciable amount what is the depth
receivable amount the appreciable amount
as we've discussed before is actually
cost of the asset
- scrap value of the asset is a
depreciable up let us quickly go through
this exercise following data pertaining
to be limited is available cost of the
second-hand plant one legality cost of
repairing twenty thousand wages paid for
installation of the plant five thousand
fire insurance premium paid for the
plant one thousand this exercise is
exactly the same as before in addition
we've got information that the residual
value is five thousand the total
appreciable amount would therefore be
eight one like eighty be two lakhs
C two like five thousand and deep two
like six thousand from our discussion
depreciable the total depreciable amount
is nothing but the cost of the asset
- scrap value the cost of the asset was
as we had discussed before one lat 80
plus 20 plus five thousand one like
eighty being the cost of the Machine
cost of repairing the plant 20 the wages
paid for installation of the plant five
thousand we get 2 lakh five thousand
that is the cost what is the scrap value
scrap value is five thousand therefore
what is the depth receivable amount is
nothing but cost - crap - like five -
five thousand equal to 2 lakh answer
should be be the depreciable amount
would be to this total amount of 2 lakh
will have to be spread over the
estimated useful life of the asset in a
manner in a suitable manner in a
systematic manner that would be the
measurement of death
each year and it will depend upon the
method of depreciation that we adopt