Before buying any assets, you must understand how to work out the depreciation of a particular asset. Several factors affect depreciation. When will you be going to start the asset in question? What is the expected life of the asset for the period the asset will remain useful? What is the purchase price of the asset at the time of buying? For how much amount you will be able to sell it if you wish at the end of its utility period. For example how much you will get on selling as scrap etc. moreover, you will also take in to the account if there are any additional cost required fro disposing the asset.

Many fixed assets such as computer hardware, plant and machinery, motor vehicle and other trade tools have a certain life that is useful for the owner and after the end of this period they wear out and become obsolete. The length of time for which a particular asset will be used productively is used for spreading the cost of the asset. All this exercise is performed for showing the cost of the asset as an expense that is creating profits over the year instead of just writing off it in the year when you purchased it.

The useful life of the asset varies vastly with the type of asset. For example, the useful life of a computer may be as little as three years. It may be working perfectly, but by then the chances are more of it becoming obsolete. Similarly, the expected life of a motor vehicle is normally between three and five years. On the contrary, if you properly maintain the plant and machinery of any manufacturing unit, its useful life may go up to 15 to 20 years. When we show it in the balance sheet, we need to record the depreciated cost of the previous year along with the provision for depreciation this year. We can find out the current value of asset by subtracting this provision from the historical value.