Accounting explained
Depreciation: Meaning, Format and Example
A counter, a fridge or a billing computer helps a shop earn for years, so its cost is not charged to profit in the year it is bought. Instead it is spread over its useful life as depreciation, a little each year.
What depreciation is
Depreciation is the part of a fixed asset's cost used up in a period, through wear, age or obsolescence. It is an expense in the P&L, but no cash leaves the business when it is recorded; the cash went out when the asset was bought. In the balance sheet, the asset is shown at cost less accumulated depreciation.
Land is not depreciated. Stock is not depreciated either; it is a current asset that is sold.
The two common methods
| Method | How it works | Pattern |
|---|---|---|
| Straight-line (SLM) | (Cost − residual value) ÷ useful life, the same every year | Equal charge each year |
| Written-down value (WDV) | A fixed percentage of the remaining book value each year | Higher in early years, falling later |
Worked example: Sri Lakshmi Stores
On 1 April 2025 the store bought fixtures and furniture for ₹1,50,000 and a computer with a receipt printer for ₹50,000. Ramesh and his accountant estimate a 10-year life with no residual value for the fixtures, and a 3-year life with ₹5,000 residual value for the computer.
Straight-line: fixtures ₹1,50,000 ÷ 10 = ₹15,000 a year; computer (₹50,000 − ₹5,000) ÷ 3 = ₹15,000 a year. Total depreciation for 2025-26 is ₹30,000, and the balance sheet shows fixed assets of ₹2,00,000 − ₹30,000 = ₹1,70,000.
| Year | Computer: SLM charge | SLM book value | Computer: WDV at 40% (illustrative) | WDV book value |
|---|---|---|---|---|
| 2025-26 | ₹15,000 | ₹35,000 | ₹20,000 | ₹30,000 |
| 2026-27 | ₹15,000 | ₹20,000 | ₹12,000 | ₹18,000 |
| 2027-28 | ₹15,000 | ₹5,000 | ₹7,200 | ₹10,800 |
The 40% WDV rate is only to show the pattern. The rates and lives you must use depend on the law that applies to you; see below.
The journal entry
At year end: Depreciation A/c Dr ₹30,000, To Accumulated depreciation A/c ₹30,000 (being depreciation on fixtures and computer for 2025-26). Some small businesses credit the asset account directly; keeping a separate accumulated depreciation account preserves the original cost, which is useful for insurance and when the asset is sold.
Which rates to use
Companies follow the useful lives in Schedule II to the Companies Act, 2013. For income tax, depreciation is allowed at the rates and on the block-of-assets basis set by the Income-tax law, which can differ from the books. Many proprietors keep one schedule for the books and let their accountant prepare the tax computation. Ask a chartered accountant which applies to you.
Common mistakes
- Charging the whole cost of equipment as an expense in the year of purchase
- Depreciating land or stock
- Continuing to depreciate an asset already sold or scrapped
- Forgetting depreciation for assets bought mid-year, or charging a full year without checking the policy
- Mixing tax rates and book rates without saying which is which
Assets bought during the year
When an asset is bought part way through the year, the accounting policy decides how much depreciation is charged in the first year: many businesses charge for the months it was used, others a full or half year. Tax rules have their own approach, so the book and tax figures can differ. Whatever you choose for the books, apply it consistently. For Sri Lakshmi Stores, both assets were bought on 1 April 2025, so a full year applies either way.
About the worked example
The examples on our accounting pages follow one shop through one year: Sri Lakshmi Stores, a kirana in Mysuru owned by Ramesh, for the financial year 2025-26. It sold ₹48 lakh of goods (before GST), made a gross profit of ₹10.4 lakh and a net profit of ₹4.7 lakh, and ended the year with a balance sheet total of ₹7.95 lakh. The figures are illustrative but they add up across every page, so you can follow one transaction from the journal to the balance sheet.
How TripleBill handles it
TripleBill keeps a fixed asset register under Accounting → Fixed assets and runs depreciation by straight-line or written-down value, posting the journal for you (Starter and Pro). Selling or scrapping an asset records the gain or loss on disposal.
General information on bookkeeping, not accounting or tax advice. For your final accounts and filings, consult a chartered accountant.
Last reviewed
Last reviewed: November 2026.
- Reference: Schedule II to the Companies Act, 2013 (useful lives, for companies)
- Reference: ICAI Accounting Standard (AS) 10, Property, Plant and Equipment
Frequently asked questions
What is depreciation in simple words?
The share of an asset's cost that is treated as used up each year and charged as an expense.
Is depreciation a cash expense?
No. Cash was paid when the asset was bought; depreciation spreads that cost over the years.
What is the difference between SLM and WDV?
Straight-line charges the same amount every year; written-down value charges a fixed percentage of the reducing balance, so more in early years.
What is residual value?
What you expect to get for the asset at the end of its useful life.
Is depreciation in the books the same as for income tax?
Not necessarily. Tax rules have their own rates; the books follow accounting policy or the Companies Act for companies.
What happens when I sell an old asset?
Remove its cost and accumulated depreciation, and record the difference between sale price and book value as a gain or loss.
Can I depreciate a second-hand asset?
Yes, on what you paid for it, over its remaining useful life in your business.
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