The following points are to be considered while ascertaining the amount of depreciation and the rate of depreciation :
1. Cost price of the asset: While determining the cost price and the purchase price of the asset, all expenses incurred to bring it up to the place of its use, its erection and installation charges are taken into consideration. In the case of old assets, if repairing is necessary, all expenses incurred on it, including the repairing expenses should be added to the purchase price.
2. Estimated life of the asset: The estimated life of the asset is the estimated period of time during which the purchased asset can be used effectively. While determining the estimated life, all the technical facts, capacity of the assets, possibilities of new inventions and business experience, etc. are to be considered.
3. Estimated scrap value: At the end of its useful life, the asset became useless. While calculating the rate of depreciation, the estimated scrap value is to be considered and deducted from the original cost of the asset.
4. Interest on the capital employed: When an asset is purchased, some capital is invested in it. If this capital was invested outside the business, it would have earned some interest. Thus, while calculating depreciation, such interest is to be taken into consideration.
5. Repairing and maintenance expenses: If money is spent on repairs and maintenance of the asset, its useful life can be increased. So, while calculating depreciation, such aspects should be considered.
6. New inventions and research: In order to face the business competition, it becomes necessary to acquire new modern machines. For this, it is necessary to know about the possible new inventions in the assets used in the business and their time interval. While determining the amount of depreciation, this time interval is considered.
7. Usage of asset: The usage of the asset is an important factor in determining the rate of depreciation. If the usage of asset is more, the amount of depreciation will be more. If a machine in the factory is used for more than one shift, the depreciation should be calculated more.
