Fundamentals of Accounting · Depreciation and Amortization

Factors Affecting Depreciation and the Accounting Standard

Updated 11 October 2026 · Fact-checked

Three factors decide the yearly depreciation: the cost of the asset, its estimated residual value and its useful life. Depreciable amount is cost minus residual value. The standard says this amount must be spread systematically over the useful life. To solve a question, find cost, deduct residual value, then allocate using the stated method.

Understand Factors Affecting Depreciation and Accounting Standard

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. It is not a way to show the market value of the asset. It spreads the cost of using an asset across the years that benefit from it.

Three factors drive the amount. The first is cost: the purchase price plus costs needed to bring the asset to working condition, such as freight and installation. The second is residual value: the amount you would currently get from disposal, after deducting disposal costs, if the asset were already as old and worn as expected at the end of its life. The third is useful life: how long the asset is expected to be useful to the business.

Depreciable amount is the cost of the asset, less its residual value. Only this amount is spread over the years. Useful life is about expected utility to your business, not the physical life of the asset. So it may be shorter than the economic life, for example if the business plans to sell machines after a few years. Estimating it is a matter of judgement based on experience with similar assets.

The standard also sets out rules you must remember. Land and buildings are accounted for separately, even if bought together. Land normally has unlimited life and is not depreciated (quarries and landfill sites are exceptions). Buildings are depreciated. A rise in the value of the land does not change the building's depreciable amount. Depreciation continues even if fair value is above carrying amount, and repairs do not remove the need to depreciate.

The method must match the expected pattern of using up the asset's benefits. Options include straight-line, diminishing balance and units of production. The method is applied consistently from period to period. The rules on this page follow AS 10. Ind AS 16 is a different standard with its own rules, so answer under the standard the question names.

Key rules to remember

Depreciable amount: Depreciable amount = Cost − Residual value; Residual value is net of estimated disposal costs. Land is not depreciated.
Straight-line depreciation per year: Annual depreciation = (Cost − Residual value) ÷ Useful life in years; Gives a constant charge as long as the residual value does not change.
Review rule (para 53): Review residual value and useful life at least at each financial year-end; If expectations differ from earlier estimates, the change is a change in accounting estimate under AS 5.
Method rule (paras 63 and 64): Choose the method that reflects the pattern of consumption of benefits; apply it consistently; Review the method at each year-end. If the expected pattern of consumption has significantly changed, change the method; this is a change in accounting estimate under AS 5 (para 63). Para 64 also allows the method to be changed in accordance with the statute. The text does not call that statutory change an estimate change.
Residual value at or above carrying amount (para 56): If residual value ≥ carrying amount, depreciation = 0; Depreciation resumes only if the residual value later falls below the carrying amount.

How to solve Factors Affecting Depreciation and Accounting Standard questions

Use this order for any question on the factors of depreciation or the standard.

1Read the question and list the cost items: purchase price, freight, installation and other costs to bring the asset into use.
2Add them to get the total cost. Leave out repairs and maintenance, which are expenses.
3Separate land from building if both are bought together. Do not depreciate land.
4Deduct the estimated residual value (net of disposal costs) to get the depreciable amount.
5Find the useful life in years from the question.
6Apply the method named in the question, for example straight-line: depreciable amount ÷ useful life. Adjust for part of a year if the date is given.
7If the question mentions a change in residual value or useful life, treat it as a change in accounting estimate under AS 5. A method change made because the pattern of consumption has significantly changed is also an estimate change. State the reason.
8Write the answer with the working shown, and quote the rule in one line.

Quickest way: Cost, scrap, life: three-number check

When to use it: Use for numerical questions where cost, residual value and life are given or can be found quickly.

Write three numbers: total cost, residual value, life.
Subtract residual from cost. This is the amount to be spread.
Divide by life for the yearly charge under straight-line.
Check that land has been excluded and that part-year time has been handled.
For theory questions, name the three factors, define each in one line, then add one rule from the standard.

Common mistakes in Factors Affecting Depreciation and Accounting Standard

Depreciating the full cost and ignoring residual value
Students remember the formula as cost ÷ life.
Fix: Always write depreciable amount = cost − residual value first.
Leaving out installation and freight from cost
Students take the invoice price as the cost.
Fix: Add all costs needed to bring the asset to working condition. Keep repairs out.
Depreciating land
Land and building are bought for one lump sum, so they are treated as one asset.
Fix: Split the price. Land is not depreciated (except quarries and landfill sites); only the building is.
Raising building depreciation when land value rises
Students think a higher property value changes the base.
Fix: An increase in land value does not affect the depreciable amount of the building.
Stopping depreciation because fair value is higher than book value, or because repairs were done
Students confuse depreciation with valuation.
Fix: Depreciation continues as long as residual value does not exceed carrying amount. Repairs do not remove the need to depreciate.
Treating a change in useful life or method as a prior period error
Students think any change means the earlier books were wrong.
Fix: Revised residual value and useful life (para 53), and a method change made because the pattern of consumption has significantly changed (para 63), are changes in accounting estimate under AS 5, not errors.

Worked examples

Example 1

A company buys a machine for ₹5,00,000 and pays ₹50,000 for installation. The estimated residual value is ₹50,000 and the useful life is 5 years. Find the depreciable amount and the annual straight-line depreciation.

Show the solution

Cost = ₹5,00,000 + ₹50,000 = ₹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 is ₹5,00,000 and annual depreciation is ₹1,00,000.

Example 2

A firm buys land and a building together for ₹80,00,000, of which ₹30,00,000 is for land and ₹50,00,000 for the building. The building's residual value is ₹5,00,000 and its useful life is 30 years. Two years later the land is worth ₹50,00,000. Find the annual depreciation on the building and explain the effect of the rise in land value.

Show the solution

Land and building are separate assets. Land is not depreciated.
Depreciable amount of the building = ₹50,00,000 − ₹5,00,000 = ₹45,00,000.
Annual depreciation = ₹45,00,000 ÷ 30 = ₹1,50,000.
The rise in land value does not affect the building's depreciable amount, so the charge stays the same.

Answer: Annual depreciation on the building is ₹1,50,000. Land is not depreciated and its rise in value makes no difference.

Exam tips

Write the three factors (cost, residual value, useful life) by name in every theory answer. Examiners look for them.
In numerical questions, show the depreciable amount as a separate line. It earns method marks even if later arithmetic slips.
If the question says land and building were bought together, split them first.
For a change in method, state that a change made because the pattern of consumption has significantly changed is a change in accounting estimate under AS 5. Otherwise the method is applied consistently.
Answer under the standard the question names. The rules on this page follow AS 10; Ind AS 16 is a different standard.

Practice questions from Depreciation and Amortization

Factors Affecting Depreciation and Accounting Standard 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 Accounting Standard: frequently asked questions

What factors affect the amount of depreciation?

The main factors are the cost of the asset, its estimated residual value and its useful life. The method chosen also changes how the amount is spread across the years.

What is the difference between residual value and depreciable amount?

Residual value is the estimated amount you would get on disposal at the end of the useful life, after disposal costs. Depreciable amount is cost minus residual value, and it is the amount spread over the useful life.

Can a company change its depreciation method?

Yes, but not casually. The method is reviewed at least at each financial year-end. If the expected pattern of consumption of benefits has significantly changed, the method is changed and this is treated as a change in accounting estimate under AS 5. The method may also be changed in accordance with the statute, and the text does not call that an estimate change.

Is land depreciated?

Normally no, because land has an unlimited useful life. Exceptions are sites like quarries and landfill. Buildings on the land are depreciated.