Factors Affecting the Amount of Depreciation

The amount of depreciation charged each year under any method is not guessed at random — it depends on a small set of measurable factors.

1. Original (historical) cost of the asset. This is the total cost of acquiring the asset and making it ready for use — the purchase price plus all costs necessary to bring the asset to its working condition, such as freight/carriage inward, installation charges, and any expenses on erection or trial runs. Depreciation is always calculated on this full 'cost', not merely the invoice price.

2. Estimated useful (working) life. The number of years (or, for a wasting asset, the estimated total output/units) the asset is expected to be usable in the business. A machine expected to last 10 years will have a different annual depreciation charge than an identical machine expected to last only 5.

3. Estimated scrap (residual/salvage) value. The amount the firm expects to realise by selling the asset (as scrap or second-hand) at the end of its useful life. Only the value that will genuinely be 'used up' — cost minus this residual value — needs to be spread as depreciation; the residual value itself is not depreciated because the firm expects to recover it on disposal.

4. Additions and extensions. Any addition made to an asset during its life (e.g., an extension built onto a machine) itself needs to be depreciated from the date it is added, adding to the total depreciation charge going forward.

5. Legal or contractual provisions. Where a lease, patent or similar right has a fixed legal period, that period (rather than an estimate of physical wear) determines the life over which the asset's cost is written off. …