How are London zones calculated?

In principle the fare you are charged depends on the zones you traveled through and the types of transportation you use (at least some rail services attract different fares from a pure tube journey). Stations on the boundary can count as either depending on which direction you travel to/from them from.

In practice though, the system doesn't actually know what route you took, it only knows which readers/gatelines you used. So the fare you get charged will depend on the route the system assumes you took, which may sometimes be different from the route you actually took, this is mostly an issue when avoiding zone 1. In some cases there are "pink readers" which you can use to indicate that you took a route other than the default route.

So if you travelled from waterloo to earls court that would be a zone 1 fare. If you turned round (without leaving the station) and travelled to say high street kensington, that would still be a zone 1 fare. On the other hand if you continued to west kensington that would be a zone 1+2 fare.

Looking at another journey in that area, if you traveled from Earls Court to Notting hill gate via the direct route, that would be a Zone 1 only journey. However it is also possible to travel between those stations via Hammersmith, West Brompton or Kensington (olympia), which would be a cheaper Zone 2 only journey. In the hammersmith case there is an out of station interchange* involved, which will tell the system what route you took. In the case of West Brompton or Kensington (olympia) you must use a pink reader to tell the system what route you took to get the cheaper fare.

* For those unfamiliar with the system, normally an oyster/contactless PAYG train/tube/DLR journey ends when you touch out. However there are some locations where you can touch out and back in at nearby stations or different parts of the same station without it ending your journey.