Depreciation
Depreciation is the systematic spreading of the cost of a tangible fixed asset over the years it is expected to be used, rather than charging it all in the year of purchase. It appears as an expense in the profit and loss account and as accumulated depreciation reducing the asset on the balance sheet. It matters because it matches the cost of using an asset to the income that asset helps earn.
What Is Depreciation?
Every machine, vehicle, computer or piece of office equipment loses value as it is used and as it ages. Depreciation is the accounting method that recognises that loss a little at a time. Instead of treating a ₹8 lakh delivery van as an ₹8 lakh expense the day it is bought, the business writes off a portion of its cost each year across its useful life, so the accounts show a truer picture of profit.
In an Indian business you meet depreciation at two points that rarely agree. Your books follow the useful lives in the Companies Act, while your income-tax computation follows the block-of-assets rates under the Income Tax Act. Because the two figures differ, depreciation is one of the most common reasons the profit in your financial statements is not the same as the profit you are taxed on.
Key terms
- Fixed Assets — Long-life resources like plant, vehicles and equipment that are depreciated.
- Current Assets — Short-life resources such as stock and receivables, which are not depreciated.
- Current Liabilities — Obligations due within a year, unaffected by depreciation.
Methods of Depreciation
Indian companies mainly use two methods. The choice changes how quickly the cost is written off, not the total amount.
| Method | How it works | When it is used in India |
|---|---|---|
| Straight-Line Method (SLM) | An equal amount is charged every year across the asset's useful life. | Buildings, furniture and most office assets where wear is even; common for financial-statement reporting. |
| Written Down Value (WDV) | A fixed percentage is applied to the reducing balance, so the charge is high early and falls each year. | Plant, machinery and vehicles that lose value fastest when new; the only method the Income Tax Act allows. |
Both methods are permitted under Schedule II of the Companies Act 2013. The Income Tax Act allows only WDV on blocks of assets.
How Depreciation Works in the Books
Depreciation moves an asset from purchase invoice to expense in a few tracked steps:
- 1Capitalise the asset
On purchase, the accountant records the asset in the fixed-asset register at cost, including freight and installation — not as an expense.
- 2Fix the useful life
The useful life is set from Schedule II (books) or the relevant block rate (tax). This is the artefact that drives every later charge.
- 3Compute the yearly charge
Each year-end, the chosen method (SLM or WDV) produces the depreciation for the year.
- 4Post the journal entry
Depreciation is debited to the P&L and credited to accumulated depreciation, reducing the asset's carrying value.
- 5Carry forward the balance
The reduced carrying amount becomes the opening value for next year, and the cycle repeats until the asset is fully written down or sold.
How to Calculate Depreciation
SLM depreciation per year = (Cost of asset − Residual value) ÷ Useful life (years)| Input | Where it comes from | Sample value (INR) |
|---|---|---|
| Cost of asset | Purchase invoice + freight + installation | ₹8,00,000 |
| Residual value | Estimated scrap value at end of life (Schedule II caps it at 5% of cost) | ₹40,000 |
| Useful life | Schedule II, Companies Act 2013 (motor vehicles – 8 years) | 8 years |
Yearly depreciation = (8,00,000 − 40,000) ÷ 8 = ₹95,000 charged to the P&L each year for eight years.
Depreciation: A Practical Example
| Particulars | Amount (INR) | Treatment |
|---|---|---|
| Delivery van purchased 1 Apr 2025 | 8,00,000 | Capitalised as a fixed asset |
| Residual value (5% cap) | 40,000 | Deducted before depreciating |
| Depreciation FY 2025–26 (SLM, 8-yr life) | 95,000 | Charged to P&L; van shown at 7,05,000 |
| Carrying value on 31 Mar 2026 | 7,05,000 | Cost less accumulated depreciation |
A Pune logistics firm buys a delivery van for ₹8,00,000. Under the straight-line method with an eight-year life, it charges ₹95,000 to the profit and loss account in FY 2025–26 and carries the van at ₹7,05,000 on the balance sheet. The same van, under the Income Tax Act's 15% WDV block rate, would attract a different figure — which is why a deferred-tax entry is often needed.
Charging the full cost as expense: Treating a capital purchase as a revenue expense overstates the current year's loss and understates the asset → restate and capitalise.
Depreciation Under Indian Accounting Rules
For companies, depreciation is governed by Schedule II of the Companies Act 2013, which prescribes useful lives rather than fixed rates and caps residual value at 5% of original cost. Accounting treatment follows AS 10 (Property, Plant and Equipment) for entities on Accounting Standards, or Ind AS 16 for entities on Ind AS. The income-tax charge is separate, computed on blocks of assets on a WDV basis under Section 32 of the Income Tax Act 1961.
- Companies Act 2013 – Schedule II — Useful lives per asset class; management may adopt a different life only with disclosure and justification.
- AS 10 / Ind AS 16 — Component accounting and periodic review of useful life and residual value.
- Income Tax Act – Section 32 — Block-of-assets WDV rates; additional depreciation for eligible plant and machinery.
Common Mistakes With Depreciation
A few recurring errors distort profit and invite scrutiny:
- Charging the full cost as expense — Treating a capital purchase as a revenue expense overstates the current year's loss and understates the asset → restate and capitalise.
- Using tax rates in the books — Applying Income Tax WDV rates in the financial statements breaches Schedule II → use useful-life-based rates for the books and reconcile the difference through deferred tax.
- Ignoring residual value — Depreciating to zero when Schedule II caps residual value at 5% overstates the charge → build in the 5% cap.
- Forgetting pro-rata in year of purchase — Charging a full year on an asset bought in March overstates depreciation → depreciate from the date the asset is ready for use.
Depreciation is the systematic spreading of the cost of a tangible fixed asset over the years it is expected to be used, rather than charging it all in the year of purchase. It appears as an expense in the profit and loss account and as accumulated depreciation reducing the asset on the balance sheet. It matters because it matches the cost of using an asset to the income that asset helps earn.
Need help with Depreciation?
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Applicable framework: Companies Act 2013 (Schedule II), AS 10 / Ind AS 16, Income Tax Act 1961 (Section 32). For general information only, not professional advice. Verify the current position for your entity before acting.