It is almost impossible to calculate the actual and accurate amount of depreciation. However, to estimate the amount of depreciation following factors are considered:
1. Original Cost of the Assets: Original cost includes the purchase price of the asset plus freight and installation expenses. Depreciation is charged on cost of asset so, it is found as:
Cost of Asset = Purchase price Freight (Transportation expenses) Installation (erection) expenses
2. Estimated Working Life of the Asset: All the fixed assets have their working life which can be estimated but not predetermined. After this period, the assets will be worthless or scrap. The working life of asset plays vital role in the determination of depreciable amount.
3. Scrap Value: Scrap value is also called as salvage or residual or terminal value which means to the value that will be realized by selling the asset after the expiry of the estimated working life. Such amount must be deducted in cost of assets in the calculation of depreciation.
4. Other Factors: The following points should also be taken into consideration while computing the amount of depreciation:
(i) Addition to the asset
(ii) Sale of the asset
(iii) Statutory provisions with regard to Income Tax Act or Companies Act etc.