Depreciated Cost
Candlefocus EditorDepreciation is a common accounting technique where a fixed asset is recorded at its cost basis, but then a certain portion of that cost is “expensed” over the life of the asset's usefulness. This approach broadly captures any gradual reduction in value that occurs due to wear and tear, obsolescence, or other physical factors. For example, an automobile or a mobile phone purchased today will be worth less several years from now due to regular use and the development of new technology advancements. For businesses, the depreciated cost of an asset is important to understand due to the fact that the cost may no longer reflect market conditions, or the asset's long-term usefulness.
The depreciated cost also allows businesses to calculate capital spending plans. By understanding the depreciated cost of a given asset, companies can assess when to replace and maintain older assets, and when to invest in new assets, while maintaining the most appropriate costs. Similarly, the depreciated cost of an asset can also help inform future accounting decisions. With this knowledge, businesses can determine which depreciation methodology to employ—such as straight-line, declining balance, units-of-production, or sum-of-the-years’ digits—which can have a significant impact on the company's financial statements.
In short, the depreciated cost is an important tool in assessing a company's capital investments and can be used to develop accounting procedures that accurately reflect the asset's life expectancy and function. Although all outside influences on asset value must be considered, the depreciated cost is still a useful way to analyze changes associated with the gradual diminishment of assets over time.