Factors on which Depreciation Depends

1. Historical (original) cost : Which includes money spent for acquisition, installation.
addition and improvement of a fixed asset. Cost of the asset, wages paid for installation.
transportation costs, legal expenses for registration of lease agreements. etc. are included.
There fore, historical cost refers to all expenses incurred before an asset is
brought into use.
2 Useful life of the asset : It is the estimated period over which the utility of an asset will
be enjoyed. It depends upon (a) legal or contractual provisions regarding lease, etc., b)
level of use of the asset, (c) degree of maintenance and (d) technological developments.
Useful life is shorter than the physical life of an asset.
3. Estimated residual value : It is the value expected to be realised after complete commercial
utilization of a fixed asset.
4. Other Relevant Factors : Some other relevant factors may be considered for deciding
the amount to be charged as depreciation. These are—
(a) Replacement cost that is the Cost that would be incurred if the old asset has to be
replaced by a new asset.
(b) Provisions of the Companies Act, Income Tax Act regarding depreciation.
(c) Costs of probable additions, alterations or improvements of the existing asset.