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Definition
The financial accounting term depreciable base is used to describe the value that is divided by the service life of the asset to determine the annual depreciation expense under the straight line method. The depreciable base is the value of the asset to be written off over time.
Calculation
Depreciable Base = Original Cost of Asset - Salvage Value of Asset
Explanation
There are two factors that influence the calculation of an asset's base for depreciation: the historical (original) cost of the asset as well as its salvage value. There can also be costs subsequent to acquisition that add to the value of an asset. In the same way the salvage value of the asset, which is defined as the amount the company expects to receive when it is removed from service or sold, can affect the asset's depreciable base.
In practice, the salvage value of many assets is very small, and companies assign a price of zero. The value of assets found on the company's balance sheet is stated in terms of original cost, not depreciable base, which is only used in the calculation of depreciation expense.
Example
Company A purchased a widget maker for $380,000, with a serviceable life of seven years and a salvage value of $30,000. In order to calculate straight line depreciation on this asset, the depreciable base is determined as:
= $380,000 - $30,000, or $350,000
The annual depreciation on the asset was then calculated to be:
= $350,000 / 7, or $50,000 per year
Related Terms
The accounting term used to describe an economic resource, which is owned by the corporation and expected to provide future benefits to its operation, is asset. Appearing on the balance sheet, assets are typically broken down into two categories:
Moneyzine EditorJanuary 5th, 2024
The financial accounting term Historical Cost Principle refers to a valuation technique used in the preparation of financial statements. The Historical Cost Principle states the value of an asset or liability is recorded on the balance sheet at its cost at the time of acquisition.Moneyzine EditorJanuary 19th, 2024
The financial accounting term costs subsequent to acquisition refers to additional expenditures associated with property, plant and equipment. In general, companies make four types of investments in existing assets: additions to plant, improvements, reinstallations and repairs.Moneyzine EditorJanuary 12th, 2024
The financial accounting term depreciation is sometimes defined as a decline in tangible plant's service potential. Depreciation is a method of allocating the cost of a tangible asset in a systematic manner to those time periods that benefit from the use of the asset.Moneyzine EditorJanuary 16th, 2024
