Depreciable Amount

Definition

The depreciable amount represents the value of a fixed asset used as the basis for calculating the depreciation charge for a particular period. This term varies depending on the method of depreciation being applied. In the diminishing-balance method, the depreciable amount is the book value of the asset at the end of the previous financial period. Conversely, when using the straight-line method, the depreciable amount is based on the cost of the asset or its revalued amount if the asset has undergone prior revaluation.

Examples

Straight-Line Method: Let’s assume a company buys a machine for $10,000 with a useful life of 10 years and no salvage value. The depreciable amount would be $10,000, and the annual depreciation using the straight-line method would be $1,000.
Diminishing-Balance Method: Using the same machine example, if the company uses the diminishing-balance method at a 20% annual depreciation rate, the first year depreciation would be $2,000 (20% of $10,000). In subsequent years, the depreciable amount would be the book value at the end of the previous period, thus decreasing annually.

Frequently Asked Questions

What is a depreciable amount?

The depreciable amount of an asset is the value from which depreciation is calculated. It is typically the cost or revalued amount of the asset minus any residual value.

How is the depreciable amount different in the straight-line and diminishing-balance methods?

In the straight-line method, the depreciable amount is based on the initial cost or revalued amount of the asset, equally spread over its useful life. In the diminishing-balance method, the depreciable amount changes each year to reflect the asset’s book value at the end of the previous period.

Can the depreciable amount change?

Yes, the depreciable amount can change if the asset undergoes revaluation or if the method of depreciation applied changes.

Is land included in the depreciable amount?

No, land is not typically depreciable because it does not wear out or get used up in the manner that buildings or machinery do.

How do you calculate the depreciable amount for revalued assets?

For revalued assets, the depreciable amount is calculated based on the revalued amount minus any salvage value, spread over the remaining useful life of the asset.

Fixed Asset: A long-term tangible piece of property or equipment that a firm owns and uses in its operations to generate income.
Depreciation: The accounting process of allocating the cost of a tangible asset over its useful life.
Diminishing-Balance Method: A depreciation method in which a constant depreciation rate is applied to the book value of an asset, resulting in diminishing depreciation expenses over time.
Straight-Line Method: A depreciation method in which an equal depreciation expense is allocated to each year of the asset’s useful life.
Revaluation: The process of adjusting the book value of an asset to reflect its current market value.

Online References

Suggested Books for Further Studies

“Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
“Financial Accounting” by Robert Libby, Patricia Libby, and Frank Hodge
“Principles of Accounting” by Belverd E. Needles, Marian Powers, and Susan V. Crosson

Accounting Basics: “Depreciable Amount” Fundamentals Quiz

### The depreciable amount of an asset is primarily used to calculate which financial figure? - [ ] Revenue - [ ] Equity - [x] Depreciation - [ ] Interest > **Explanation:** The depreciable amount of an asset is primarily used to calculate the depreciation expense for a specific accounting period. ### When using the straight-line method, the annual depreciation expense is... - [ ] Increasing each year - [ ] Decreasing each year - [x] Equal each year - [ ] Variable based on usage > **Explanation:** The straight-line method spreads the depreciable amount equally over the useful life of the asset, resulting in equal depreciation expense each year. ### How is the depreciable amount determined in the diminishing-balance method? - [ ] Initial cost divided by useful life - [ ] Current market value - [ ] Sum of past and future expenses - [x] Book value at the end of the previous period > **Explanation:** In the diminishing-balance method, the depreciable amount is the book value of the asset at the end of the previous period, and a constant depreciation rate is applied to it each year. ### Is land considered in the depreciable amount? - [ ] Sometimes - [x] No - [ ] Yes, always - [ ] Only if it is revalued > **Explanation:** Land is typically not subject to depreciation because it does not wear out or get used up in the same way as buildings or machinery. ### What changes the depreciable amount when applying the straight-line method? - [ ] Market value fluctuations - [ ] Depreciation rate - [ ] Book value at period end - [x] Asset cost or revaluation > **Explanation:** In the straight-line method, the depreciable amount is based on the initial cost of the asset or its revalued amount if it has undergone revaluation. ### Which of the following methods could result in a changing annual depreciation expense? - [ ] Straight-line Method - [x] Diminishing-Balance Method - [ ] Both methods - [ ] Neither method > **Explanation:** The diminishing-balance method calculates depreciation based on the book value at the end of the previous period, leading to a changing (typically decreasing) annual depreciation expense. ### Why might a company choose to revalue an asset? - [ ] To mark it for sale - [ ] To increase its depreciation expense - [ ] To comply with tax requirements - [x] To reflect its current market value > **Explanation:** Companies revalue their assets to reflect the current market value, which helps in presenting a more accurate financial position. ### An asset's depreciable amount influenced by revaluation impacts... - [ ] Revenue recognition. - [ ] Short-term expenses and taxes. - [ ] Equity and long-term liabilities. - [x] Depreciation calculation and net book value. > **Explanation:** Revaluing an asset impacts the depreciable amount, which in turn affects how depreciation is calculated and also alters the net book value of the asset on financial statements. ### What is required for an asset to be depreciated? - [ ] High initial value - [ ] Long transportation time - [x] Expected useful life and usage in operations - [ ] Low market value > **Explanation:** For an asset to be depreciated, it should have an expected useful life and be used in business operations for producing income. ### The diminishing-balance method is ideally used for... - [ ] Assets with uniform usage over time - [x] Assets that rapidly lose value in initial years - [ ] Intangible assets - [ ] Assets without a fixed usage pattern > **Explanation:** The diminishing-balance method is ideally used for assets that lose value more rapidly in the initial years of use, like technological equipment or machinery.

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