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Depreciation, Provisions and Reserves 233 condition. According to Accounting Standand-6 of ICAI, 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”. For example, a photocopy machine is purchased for ` 50,000 and ` 5,000 is spent on its transportation and installation. In this case the original cost of the machine is ` 55,000 (i.e. ` 50,000 + `5,000 ) which will be written-off as depreciation over the useful life of the machine. 7.5.2 Estimated Net Residual Value Net Residual value (also known as scrap value or salvage value for accounting purpose) is the estimated net realisable value (or sale value) of the asset at the end of its useful life. The net residual value is calculated after deducting the expenses necessary for the disposal of the asset. For example, a machine is purchased for ` 50,000 and is expected to have a useful life of 10 years. At the end of 10th year it is expected to have a sale value of ` 6,000 but expenses related to its disposal are estimated at ` 1,000. Then its net residual value shall be ` 5,000 (i.e. ` 6,000 – ` 1,000). 7.5.3 Depreciable Cost Depreciable cost of an asset is equal to its cost (as calculated in point 7.5.1 above) less net residual value (as calculated in point 7.5.2,) Hence, in the above example, the depreciable cost of machine is ` 45,000 (i.e., ` 50,000 – ` 5,000.) It is the depreciable cost, which is distributed and charged as depreciation expense over the estimated useful life of the asset. In the above example, ` 45,000 shall be charged as depreciation over a period of 10 years. It is important to mention here that total amount of depreciation charged over the useful life of the asset must be equal to the depreciable cost. If total amount of depreciationchargedislessthanthedepreciablecostthenthecapitalexpenditureis underrecovered.Itviolatestheprincipleofpropermatchingofrevenueandexpense. 7.5.4 Estimated Useful Life Useful life of an asset is the estimated economic or commercial life of the asset. Physical life is not important for this purpose because an asset may still exist physically but may not be capable of commercially viable production. For example, a machine is purchased and it is estimated that it can be used in production process for 5 years. After 5 years the machine may still be in good physical condition but can’t be used for production profitably, i.e., if it is still used the cost of production may be very high. Therefore, the useful life of the machine is considered as 5 years irrespective of its physical life. Estimation of useful life of an asset is difficult as it depends upon several factors such as Reprint 2026-27