Question

What costs are included in determining the total cost of an asset?

Why would a company include more than just the purchase price of an asset?

Some argue that companies depreciate assets because they lose value. From a financial accounting perspective, is this true? Why or why not?

Answer 1

The costs included in determining the total cost of an asset are:

1. Purchase price of the asset

2. Installation cost of the asset

3. Freight charges on the asset

4. Legal expense on the purchase of asset

5. Any other one-time expense paid at the time of purchase of the asset

Any expense paid on the asset which is not recurring in nature and is a one-time payment at the time of purchase, must be capitalised. Also any expense paid which adds a value to the asset like cost of painting a building for the first time must be included in the cost of the asset. Since such expenditure are non-recurring thus they cannot be charged as a revenue expense. It has to be capitalised and be included in the cost of the asset.

Assets like furniture, machinery, etc have a definite useful life after which they become completely obsolete. Thus it is necessary to allocate its cost over the period of its useful life. This means its monetary value will keep on diminishing during this period. For this, we depreciate asset for the loss in its value. This helps to ascertain the profitability and the true financial position of the business at the end of the accounting period.