Accountancy · Ch 7 — Depreciation, Provisions and Reserves
Cost of Asset
Cost of Asset
Cost of Asset
The cost of an asset — also called its original cost or historical cost — is the foundation on which depreciation is calculated. You cannot compute depreciation until you know what amount to depreciate, and that amount is the total cost incurred to acquire the asset and make it ready for use.
The rule is simple: any expenditure that is necessary to put the asset in working condition becomes part of its cost. This goes far beyond just the purchase price.
What is included in the cost of an asset?
The cost includes:
- Invoice price — the price paid to the seller
- Freight and transportation cost — getting the asset from the seller to your premises
- Transit insurance — insuring the asset during transport
- Installation cost — setting up the asset so it can operate
- Registration cost — legal fees, registration charges, stamp duty (especially for land, buildings, vehicles)
- Commission paid on purchase — brokerage or commission paid to an agent for arranging the purchase
- Add-on items such as software that is essential for the asset to function
If you buy a second-hand asset, the cost also includes any initial repair cost needed to put that used asset into workable condition. Repairs made after the asset is already in use are not capitalised — they are treated as revenue expenditure.
The accounting standard definition
According to Accounting Standard-6 of the Institute of Chartered Accountants of India (ICAI), the cost of a fixed asset is:
"the total cost spent in connection with its acquisition, installation and commissioning as well as for addition or improvement of the depreciable asset."
Notice that the definition also covers additions or improvements made later. If you upgrade a machine or add a new component that increases its useful life or capacity, that cost is added to the asset's book value and depreciated over the remaining life.
Example
A photocopy machine is purchased for ₹50,000. An additional ₹5,000 is spent on its transportation and installation.
| Particulars | Amount (₹) |
|---|---|
| Purchase price of photocopy machine | 50,000 |
| Add: Transportation and installation cost | 5,000 |
| Original cost of the machine | 55,000 |
This ₹55,000 is the amount that will be written off as depreciation over the useful life of the machine. The ₹5,000 spent on transport and installation is not an expense of the current year — it is capitalised as part of the asset's cost.
Accounting treatment
When the asset is purchased and these additional costs are incurred, the journal entry is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Asset A/c (e.g., Photocopy Machine) | Dr. | 55,000 | ||
| To Bank / Cash / Creditor A/c | 55,000 |