Basic Factors of Determination of Depreciation

Learning Objectives:

1. What are the basic factors of depreciation determination?

For calculation depreciation the basic factors are:

1. The original cost of the asset.
2. The estimated working life of the asset or the number of years the asset is expected to last.
3. The estimated residual or scrap value at the end of its life. It is the value which the asset will fetch when discarded as useless.
4. The amount to be spent periodically for repairs and renewals. If the repairs necessary to keep the asset in a proper state of efficiency are regularly carried out, the life of the asset is prolonged and the amount of annual depreciation is proportionately lowered.
5. The possibility of the asset becoming obsolete. If there are great chances of improvements being made in a particular asset on account of inventions, higher depreciation should be written off such an asset.

Usually engineers and experts give their opinion about these and they are accepted by businessmen. After getting information on all these points, it is easy to access the rate of depreciation.