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Historical cost

It is also known as Purchase cost, Original cost or Acquisition cost. Cost = Purchase Cost + Capitalized Expenses. Expenses that have to be capitalized are as follows:

  • Wages paid for installation of assets
  • Delivery Charges
  • Commission and all other such costs that increase the capacity of the assets

Note: Capitalized expenses do not include annual maintenance cost, fire insurance premium, repairs on new fixed assets. However, repairs on second-hand machine have to be capitalized.


Useful life of the asset


Useful life is either the period over which a depreciable asset is expected to be used by the enterprise; or the number of production of similar units expected or hours worked to be obtained from the use of the asset by the enterprise. Determination of the useful life is a matter of estimation and is normally based on various factors including experience with similar types of assets.

Scrap value/residual value/salvage value


Estimated residual value of a depreciable asset implies to the value expected to be realized on its sale or exchange on the expiry of its useful life.

Depreciable amount


Depreciable amount of an asset is its historical cost less the estimated residual value. For example, if the cost of the asset is ₹ 10,000 and the estimated residual value is ₹ 2,000, then the depreciable amount is (₹ 10,000 - ₹ 2,000) = ₹ 8,000 which will be allocated over the useful life of the asset.

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