The amount of depreciation to be charged to the Profit and Loss Account in respect of a particular fixed asset is affected by following factors:

1.Cost of the asset: Cost of the asset should include purchase price and all other costs incurred to bring the asset to usable condition like transportation costs erection charges, etc. It is to be noted that financial charges; such as interest on loan taken for the-purchase of the asset is not to be included in the original cost of an asset.

2.Estimated Working Life of the Asset: The useful or economic life of the asset can be stated in terms of time i.e., years, months, hours and in terms of quantity, i.e. number of units of output or any other operating measure such as kilometers in the case of lorries, motor vans, etc.

3.Estimated scrap value: Scrap Value (also called salvage value, residual value) refers to the estimated amount expected to be realized when the asset is sold at the end of its useful life. While the original cost of an asset can be correctly determined, useful life and salvage value can only be estimated, based on certain assumptions.