Fundamentals of Financial and Cost Accounting · Depreciation (Straight Line and Diminishing Balance Methods)

Factors Affecting Depreciation and AS 6 Basics

Updated 10 October 2026 · Fact-checked

Depreciation is the systematic allocation of an asset's depreciable amount over its useful life. Three factors decide it: cost, estimated useful life and residual (scrap) value. Depreciable amount = Cost − Residual value. AS 6 requires this amount to be charged to profit and loss over the life and disclosed in the accounts.

Understand Factors Affecting Depreciation and AS 6 Basics

A machine bought today will not serve you forever. It wears out, becomes outdated or reaches the end of a legal or contractual term. Depreciation spreads the cost of such an asset over the years in which it earns revenue, so each year's profit bears a fair share of the cost.

Three factors decide how much depreciation you charge. The first is cost: the purchase price plus freight, installation and other expenses needed to bring the asset to working condition. The second is estimated useful life: the period over which the asset is expected to be used by the business, which can be shorter than its physical life. The third is residual value (scrap value): the amount you expect to get when the asset is finally disposed of, net of disposal costs.

Cost minus residual value is the depreciable amount. Only this part is written off. Land is normally not depreciated, because it usually has an unlimited life.

AS 6 (Depreciation Accounting) is the accounting standard on this. In plain words: depreciable amount is allocated systematically over the useful life; the method chosen should be applied consistently from period to period; the depreciation charge is normally shown in the profit and loss account; and the accounts should disclose the method used, the depreciation charged for the period and the total depreciation against each class of asset. Useful life is a matter of estimate. It depends on expected usage, wear and tear, technical obsolescence and legal limits such as lease terms.

A change in method is allowed only if the law or the standard requires it, or if it gives a more appropriate presentation. Revising the estimated useful life is a change in estimate, and the unamortised depreciable amount is spread over the remaining life.

Key formulas to remember

Cost of asset: Cost = Purchase price + Freight + Installation + Other costs to make it ready for use; Include only costs needed to bring the asset to working condition. Routine repairs are expenses, not cost.
Depreciable amount: Depreciable amount = Cost − Residual (scrap) value; Residual value is the expected net disposal value at the end of useful life.
Annual depreciation (straight line): Annual depreciation = (Cost − Residual value) ÷ Estimated useful life in years; Use this to check the effect of the factors. Longer life or higher scrap value lowers the yearly charge.
Effect of factors: Higher cost ↑ depreciation; longer life ↓ depreciation per year; higher residual value ↓ depreciation; Holds when the other two factors stay the same.

How to solve Factors Affecting Depreciation and AS 6 Basics questions

Use this order for any question on factors, depreciable amount or AS 6.

1Read the question and note which factor or rule is being tested: cost, life, residual value or an AS 6 requirement.
2Work out the full cost. Add freight, installation and other costs to bring the asset to use. Leave out later repairs and training costs unless stated as part of cost.
3Note the residual value. If none is given, treat it as nil.
4Calculate depreciable amount = Cost − Residual value.
5Divide by useful life if asked for yearly straight line depreciation. Check that the period matches the units given (years or months).
6For theory options, match each statement with AS 6: consistency of method, charge to profit and loss, disclosure, and revision of life as an estimate.
7Check that your answer matches one option exactly, and re-read for hidden items such as land or part-year use.

Quickest way: Cost, scrap, life in 30 seconds

When to use it: Use it for numerical MCQs asking for depreciable amount or annual depreciation.

Add every cost to get the total cost in one line.
Subtract scrap value straight away.
Divide by life only if the question asks per year.
Eliminate options that equal cost ÷ life, since they forget scrap value.
For theory MCQs, eliminate options that say depreciation is a source of cash or that land is always depreciated.

Common mistakes in Factors Affecting Depreciation and AS 6 Basics

Depreciating on the purchase price alone and ignoring freight and installation.
Students read only the invoice price in the question.
Fix: Scan the question for every cost incurred before the asset is ready for use and add them.
Forgetting to deduct residual value before dividing by life.
The short formula cost ÷ life is easy to remember.
Fix: Always write depreciable amount first, then divide.
Treating depreciation as a way of saving cash or building a fund.
Students confuse it with a reserve or sinking fund.
Fix: Remember it is a non-cash charge that allocates cost. Cash is not set aside by the charge itself.
Using the physical life instead of the useful life to the business.
A machine may last 20 years but the business expects to use it for 10.
Fix: Use the life given as the expected useful life to the business.
Treating a revision of useful life as a change of accounting method or correcting earlier years.
Both seem like a change in depreciation.
Fix: A revised life is a change in estimate. Spread the remaining depreciable amount over the revised remaining life.

Worked examples

Example 1

A machine is bought for ₹5,00,000. Freight is ₹20,000 and installation is ₹30,000. Its estimated useful life is 5 years and the expected scrap value is ₹50,000. Find the depreciable amount and the annual straight line depreciation.

Show the solution

Cost = 5,00,000 + 20,000 + 30,000 = ₹5,50,000.
Depreciable amount = 5,50,000 − 50,000 = ₹5,00,000.
Annual depreciation = 5,00,000 ÷ 5 = ₹1,00,000.

Answer: Depreciable amount ₹5,00,000; annual depreciation ₹1,00,000.

Example 2

Which one of the following is NOT a factor that directly determines the depreciation amount of an asset? (a) Cost of the asset (b) Estimated useful life (c) Residual value (d) The market price of the owner's shares

Show the solution

Depreciation depends on cost, expected useful life and residual value.
Options (a), (b) and (c) are the three factors.
The market price of the owner's shares has no link to the asset's cost allocation.

Answer: (d) The market price of the owner's shares

Exam tips

Expect direct questions that ask you to list or identify the factors: cost, useful life and residual value.
In numerical MCQs, check for extra costs like freight and installation. They are the usual trap.
Learn AS 6 as four ideas: systematic allocation, consistent method, charge to profit and loss, and disclosure.
If an option says land is depreciated as a normal rule, treat it with suspicion.
When no scrap value is given, take it as nil and move on.

Practice questions from Depreciation (Straight Line and Diminishing Balance Methods)

Factors Affecting Depreciation and AS 6 Basics in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Factors Affecting Depreciation and AS 6 Basics: frequently asked questions

What are the factors affecting depreciation?

The main factors are the cost of the asset, its estimated useful life and its residual (scrap) value. Cost and residual value together give the depreciable amount. Useful life decides how long that amount is spread over.

What is the depreciable amount formula?

Depreciable amount = Cost − Residual value. Under the straight line method, you divide this by the useful life in years to get the yearly charge.

What does AS 6 say in simple words?

AS 6 says that depreciable amount should be allocated systematically over the useful life of the asset. The method should be applied consistently, the charge should normally go to the profit and loss account, and the method and amount should be disclosed.

How do I decide the useful life and residual value of an asset?

They are estimates based on expected usage, wear and tear, obsolescence and any legal limits. In exam questions they are given to you. If residual value is not mentioned, take it as nil.