Depreciation Calculation in Accounting for Asset Management

The homework assignment focuses on understanding how to calculate depreciation in accounting, particularly for the first year of an asset's use. It describes depreciation as a non-cash expense representing wear and tear due to usage, fashion changes, and obsolescence. The solution outlines three critical factors needed to ascertain first-year depreciation: cost of the asset (including purchase price, taxes, duties, freight, and insurance), useful life (determined per accounting standards or company management with proper disclosure if deviating), and scrap value (expected market value at the end of its useful life). These elements are integral in calculating the annual depreciation amount that affects the net carrying value of an asset. This comprehensive analysis aims to equip students with the knowledge required for accurate financial reporting as per accounting principles.

ANSWER
Depreciation is the amount which is charged as an expense in the statement of profit and loss. It is the
amount which is charged for the loss of wear and tear of the assets of the company. This loss of wear
and tear is generally caused by few factors which include the method of usage by the company, the
change in fashion and obsolescence and so on. Depreciation is the non cash item and it usually provides
the material effect.
Following types of the information is required for ascertaining the amount of depreciation for the first
year:
1. Cost of the Asset – Cost of the asset is the amount equivalent to the amount paid for the
acquisition of that asset and bringing that asset to the present location and condition. The cost
includes the purchase price of the asset which is paid to the vendor, the amount of taxes, duties
and other similar levies paid to the government authorities and the amount of freight and
insurance incurred to bring the asset to the location where the assets are required to be placed
and from that place the asset is put to use (Li, 2016).
2. Useful Life of the Asset – The useful life of the asset is defined as the life which the asset will
have for the coming future years. The useful life is generally expressed in the number of years.
The Corporations Act, 2001 read with the accounting standards have prescribed the useful lives
of the asset which every company has to follow. The management of the company is required to
decide the useful life of an asset keeping in consideration with the provisions of the accounting
standard and in case any deviation is there then the company is required to disclose the same
fact of the depreciation with the reasons for adopting the different useful life for that particular
asset. On the basis of this useful life only the rate of depreciation or the amount of depreciation
is calculated and written off during the year so as to arrive at the net carrying amount as per the
requirements of the accounting standards.
3. Scrap Value of the Asset - The scarp value of the asset is defined as the value which the
company will receive at the time of expiry of the useful life of the asset and is equivalent to the
amount which the asset will fetch in the open market at the time of the end of the useful life of
the asset (Rus, 2016). The scrap value is the third and last needs which are considered as the
integral part for calculating the depreciation of the first year. The determination of the scrap

value totally depends upon the discretion of the management and the management of the
company shall make the judgment with professional care.
In this way, the afore said three requirements are the basic requirements for the calculation of the
depreciation for the first year and subsequently the depreciation will be calculated with the available
figures.
REFERENCES
Li, W.C., (2016), “Depreciation of business R&D capital “. National Bureau of Economic Research (No.
w22473).
Rus, L., (2016), “Accounting, analysis and auditing of information regarding tangible assets in the
romanian economic entities.” Annales Universitatis Apulensis: Series Oeconomica, 18(2), p.86.