ALLOWANCE OF INTEREST ON FIRST COST.
Page 9
If you've noticed an error in this article please click here to report it so we can fix it.
How to Deal with Depreciation.
IN ASCERTAINING THE total cost of operation of a commercial vehicle, one of the items which should always be taken into account is the allowance of a reasonable percentage of interest upon the value of the machine. The common method is to base this allowance always upon first cost,..but, strictly speaking, this is not correct. Thus, if the cost is 2500 and the percentage regarded as reasonable•interest on the money invested is 5 per cent., it is correct to charge 225 against the vehicle as interest on capital for the first year. The proper amount to charge in the subsequent years depends, however, 'upon the allowance that has been made for depreciation.
• If it has been decided to estimate' depreciation on the basis of a five year life and to write off /100 each year, then at the end of the first year the capital which remains .invested in the ,vehiele is only 2400, and the interest for the second year at 5 per cent. should only be 220, while for the third year it would be 215 and so on. As a matter of fact, even this arrangement is hardly fair to the older vehicles. Depreciation in any year would be more accurately represented by a percentage on the value of the vehicle at the beginning of the year, than by a percentage of its original value. Thus, if the original coat were 2800 and we agreed that the value would decrease by 25 per cent. in each year, the vehicle would stand in the books at 2600 at the end of the first year, at 2450 at the end Of the second year, and at 2337 lOs. at the end of the third year. On this basis We should, of course, never depreciate the value down to nothing, but at the end Of six_yea,rs the vehicle would stand at about 2145, while at the 'end of eight years its value would be estimated at about 280. For a good machine of modern construction this basis of depreciation would probably be not far wrong.
Facilitating Income Tax Assessments.
If it were adopted, then during the first year we should have 240 as interest at 5 per cent:, during the second 230, during the third year L22 10e., and ssi .on. By adopting a proper basis for allowance of de= preciation and of interest we should be acting more fairly towards the older-vehicles of the fleet which are, Of course, liable to cost more in kg:airs and maintenance., and we should:get a better idea as to when we were actiially reaching the point at which 'higher cost of operation ceased to justify us in maintaining an old vehicle in service., . • — • , The *hole •subject is really one which deserves thorough analysis, and With-regard te sithich some definite principle should be recognized in orderto facilitate assessments for income tar, as well as for the purPose of giving the motor user a Mose accurate idea of the real perferrnanee of his machines: