Factors Affecting the Amount of Depreciation

The amount of depreciation charged each year is not an arbitrary figure. It is determined by three fixed parameters: the cost of the asset, its estimated useful life, and its estimated residual (scrap) value at the end of that life. These three factors are the only variables that affect the calculation of depreciation under any method.

Cost of the Asset

This is the total amount spent to acquire the asset and make it ready for use. It includes the purchase price, freight, installation charges, and any other directly attributable costs. A higher cost leads to a higher total depreciation to be written off over the asset’s life.

Estimated Useful Life

This is the period — in years or units of output — over which the business expects to use the asset. It is an estimate based on past experience, technical assessment, or legal limits. A longer useful life spreads the cost over more periods, reducing the annual depreciation charge; a shorter life increases it.

Estimated Residual (Scrap) Value

This is the amount the business expects to recover from selling the asset at the end of its useful life. It is also called salvage value. If the residual value is higher, the total amount to be depreciated (cost minus residual value) is lower, and vice versa. If no residual value is expected, the entire cost is depreciated.