Factors Affecting Depreciation

How much depreciation should you charge? It depends on these factors:

1. Cost of Asset

Definition: Original purchase price + all expenses to make it ready for use

Includes:

• Purchase price
• Transportation charges
• Installation charges
• Import duty
• Legal fees

Example: Machine price ₹5,00,000 + Transport ₹20,000 + Installation ₹30,000
Total Cost: ₹5,50,000 (This is the base for depreciation)

2. Estimated Useful Life

Definition: How long the asset will be used

Examples:

• Building: 50-60 years
• Machinery: 10-15 years
• Computer: 3-5 years
• Vehicle: 8-10 years

Longer life → Lower annual depreciation

3. Estimated Scrap Value (Residual Value)

Definition: Expected sale value at end of useful life

Example: Car cost ₹10 Lakhs, after 10 years can sell for ₹1 Lakh
Scrap Value: ₹1 Lakh
Depreciable Amount: ₹10L - ₹1L = ₹9 Lakhs

4. Method of Depreciation

Different methods give different depreciation amounts:

• Straight Line Method (SLM)
• Written Down Value Method (WDV)
• Units of Production Method

Formula

Depreciable Amount = Cost - Scrap Value

Annual Depreciation (SLM) = Depreciable Amount ÷ Useful Life

Example

Machine Cost: ₹6,00,000
Scrap Value: ₹50,000
Useful Life: 10 years

Depreciable Amount: ₹6,00,000 - ₹50,000 = ₹5,50,000
Annual Depreciation: ₹5,50,000 ÷ 10 = ₹55,000

Quiz

💡 Final Wisdom: "Four factors: Cost (how much you paid), Life (how long it lasts), Scrap (what's left), Method (how you calculate). Master these, master depreciation!"