Depreciable Cost

Depreciable Cost

The depreciable cost of an asset is the portion of its total cost that will actually be consumed over its useful life and therefore needs to be written off as depreciation. It is not the full purchase price — you must subtract what you expect to recover at the end.

How to Calculate Depreciable Cost

Depreciable cost = Cost of the asset (as per §7.5.1) – Net residual value (as per §7.5.2)

Using the textbook's example: a machine is bought for ₹50,000 and has an estimated net residual value of ₹5,000 after 10 years. The depreciable cost is ₹45,000. This ₹45,000 is the amount that will be spread across the 10-year useful life as depreciation expense.

Why This Matters

Only the depreciable cost is charged as depreciation over the asset's life. In the example, ₹45,000 (not ₹50,000) will be allocated as expense over 10 years. The ₹5,000 residual value is not depreciated — it is expected to be recovered when the asset is sold or scrapped.

The Matching Principle

A critical rule: the total depreciation charged over the entire useful life must equal the depreciable cost. If the total depreciation charged is less than the depreciable cost, the capital expenditure is said to be under-recovered. This violates the principle of proper matching of revenue and expense — you would be understating expenses in some periods and overstating profit, which defeats the purpose of depreciation accounting.

Accounting Treatment

There is no separate journal entry for "depreciable cost." Instead, the depreciable cost is the amount used in the periodic depreciation entry: