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Question
Explain basic factors affecting the amount of depreciation
Solution
The basic factors which affect the amount of depreciation are as follows:
1. Depreciable cost - It is the cost which is derived after the subtraction of both the residual cost and the various costs of asset.
The amount of the total depreciation should be equal to the amount of the depreciation charged over the useful life of the asset.
2. Net residual value - It is referred to as the value of the sales of the assest after its useful life is completed.
Its calculation is made by the subtraction of all expenses which was incurred during the disposing of the asset.
3. Various Cost of the asset - An asset will occur various costs which is apart from the basic purchase cost of the asset.
These costs can be in the form of the transportation, the charges of the commission, the cost of the insurance etc.
These are the cost which is made to put the asset into the working condition.
4. Useful life estimation - The actual commercial life of the asset is said to be the useful life of any asset.
This hence excludes the concept of the physical life of the asset as it considers the fact that the asset will continue to sustain even after its useful life ends which may not be of the commercial productivity for the business.
