Factors for Calculating Depreciation

While calculating the depreciation of non-current assets, following factors involve and must always be consider:

(1) Cost Factor – The Original Cost of Asset:

The cost of a non-current asset includes all amounts incurred in acquiring the asset and to bring it into working condition. In addition to the purchase price of an asset, the following costs may be included.

(i) Delivery or transportation charges to bring the asset within the business premises

(ii) Import or custom duties

(iii) Costs to install the asset

(iv) Legal fees and architects’ fees, incurred in acquiring the asset

(2) Time Factor – The Estimated Useful Economic Life:

The estimated useful life of an asset represents the period for which it will be used and not for how long the asset will last. Consequently, a business may decide to dispose of an asset, when it becomes uneconomical to continue to use it, even though some physical life is still left.

As mentioned earlier, depreciation is based on the estimated economic life rather than the potential physical life of the non-current asset. For instance, an engineer might expect to use a computer for two years and then replace it with a more advanced computer. A lawyer purchasing a similar computer in the same year expects to use it for four years. For both individuals useful lives of computers are different, whereas both computers may have same working lives.

(3) Scrap Value of the Asset – The Approximate Residual Value at the End of its Life:

Residual value also referred to as scrap value is the estimated disposal value of an asset at the end of its estimated useful life. However, a residual value of zero is assumed if it is likely to be an insignificant amount.