Definition of 'Depreciated Cost'
Depreciation is calculated using a depreciation method. There are several different depreciation methods, but the most common is the straight-line method. Under the straight-line method, the same amount of depreciation is recorded each year over the asset's useful life.
The formula for calculating depreciation under the straight-line method is:
Depreciation = (Cost - Salvage Value) / Useful Life
* Cost is the original cost of the asset
* Salvage Value is the estimated value of the asset at the end of its useful life
* Useful Life is the number of years over which the asset will be depreciated
Once the depreciation expense has been calculated, it is subtracted from the asset's book value to arrive at the depreciated cost. The book value of an asset is its original cost minus accumulated depreciation.
The depreciated cost of an asset is important for several reasons. First, it is used to determine the amount of depreciation expense that will be recorded each year. Second, it is used to calculate the gain or loss on the sale of an asset. Third, it is used to determine the amount of capital gains taxes that will be owed on the sale of an asset.
It is important to note that the depreciated cost of an asset is not the same as its fair market value. Fair market value is the price that an asset would sell for in an open market. The depreciated cost of an asset is typically lower than its fair market value, because depreciation takes into account the fact that the asset is losing value over time.
The depreciated cost of an asset can be used to determine the amount of money that is available for a loan. For example, if a business wants to borrow money to purchase a new piece of equipment, the lender will typically require the business to provide collateral. The depreciated cost of the equipment can be used as collateral for the loan.
The depreciated cost of an asset can also be used to determine the amount of insurance coverage that is needed. For example, if a business wants to insure its equipment, the insurance company will typically require the business to provide a depreciated cost value for the equipment. This value will be used to determine the amount of insurance coverage that is needed.
The depreciated cost of an asset is an important financial concept that is used in a variety of situations. It is important to understand how depreciation is calculated and how it is used in order to make informed financial decisions.
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