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

Total cost of the asset includes all the costs necessary to bring the asset ready for its intended use.

All the costs incurred from purchasing the asset till the time the asset is ready for use, are included in the cost of the asset. It includes the purchase price plus all non refundable taxes and duties plus frieght and other carrying charges plus insurance whie in transit plus installation costs and any other cost incurred till the time the asset is ready for use.

Depreciation is the process of allocation of the cost of asset over its useful life.

Companies depreciate assets because they lose value, From a financial accounting perspective, this is true because depreciation is the allocation of the cost of asset over its useful life. Usually assets keep on depreciating in value year after year and their cost must be allocated and expensed proportionately to the periods benefitted, in order to compute the net income properly.