---
title: "Accumulated Depreciation: Formula, Account Type & Example"
description: "Understand accumulated depreciation definition, why it is important, account type, formula to calculate it, and a practical example with net book value explaine"
canonical: "https://busy.in/accounting/accumulated-depreciation-meaning-formula-and-practical-example/"
author: "Vineet Goyal"
published: "2025-05-16T07:51:35.000Z"
category: "Accounting"
---

-   Accumulated depreciation is the total depreciation charged on a fixed asset till date.
-   It is a contra-asset account, which means it reduces the value of fixed assets on the balance sheet.
-   It normally has a credit balance.
-   Depreciation expense appears in the Profit and Loss Account, while accumulated depreciation appears in the balance sheet or fixed asset schedule.
-   The basic formula is: Original Cost - Net Book Value = Accumulated Depreciation.
-   Under the Income-tax Act, 1961, depreciation was governed by Section 32. From tax years beginning on or after 1 April 2026, the corresponding depreciation provision is Section 33 of the Income-tax Act, 2025. Tax depreciation is generally calculated on a block of assets using the WDV method.
-   Under the Companies Act, depreciation is generally based on useful life and residual value under Schedule II.

# Accumulated Depreciation: Meaning, Formula, Journal Entry and Examples

## **What is Accumulated Depreciation?**

Accumulated depreciation is the total depreciation recorded against a fixed asset over its life so far. It does not show the market value of the asset. It only shows how much of the asset’s cost has been allocated as an expense in the books.

Accumulated depreciation helps a business understand the current book value of its fixed assets. Without it, the balance sheet would continue to show assets at their purchase cost even after years of use. It also helps in [**planning asset replacement**](https://busy.in/accounting/capital-expenditure-investing-in-long-term-growth/) . If the accumulated depreciation on a machine is close to its depreciable value, the business can assess whether the machine remains efficient or needs replacement.

It is also useful [**during audits**](https://busy.in/accounting/gst-audit-preparation-using-software/) because the fixed asset register, depreciation entries, and balance sheet values need to match. For businesses claiming tax depreciation, the asset details should support the depreciation claimed under the applicable income-tax law. For tax years beginning before 1 April 2026, this generally refers to the Income-tax Act, 1961. For tax years beginning on or after 1 April 2026, it refers to the Income-tax Act, 2025. For example, a business buys office equipment for ₹1,00,000. It records depreciation of ₹20,000 every year. Then:

| Year | Depreciation Expense | Accumulated Depreciation |
| --- | --- | --- |
| Year 1 | ₹20,000 | ₹20,000 |
| Year 2 | ₹20,000 | ₹40,000 |
| Year 3 | ₹20,000 | ₹60,000 |

After 3 years, accumulated depreciation is ₹60,000. If the original cost was ₹1,00,000, the book value becomes ₹40,000.

## **Is Accumulated Depreciation an Asset or Liability?**

Accumulated depreciation is neither a normal asset nor a liability. It is a **contra-asset account**. A fixed asset account usually has a [**debit balance**](https://busy.in/accounting/double-entry-bookkeeping-system-definition-rules-and-examples/) . Accumulated depreciation has a credit balance and reduces the value of that asset. Basically, it is not a liability because the business does not owe this amount to anyone. It is simply an accounting record of how much asset value has already been charged as depreciation.

| Account | Normal Balance | Type |
| --- | --- | --- |
| Plant and Machinery | Debit | Asset |
| Depreciation Expense | Debit | Expense |
| Accumulated Depreciation | Credit | Contra-asset |

## **Accumulated Depreciation on the Balance Sheet**

Accumulated depreciation is shown as a deduction from the gross value of fixed assets. In financial statements, this is commonly shown in the fixed asset schedule or notes. Under [**Ind AS 16**](https://www.icai.org/post/13754) , property, plant and equipment under the cost model is carried at cost less accumulated depreciation and accumulated [**impairment losses**](https://busy.in/accounting/provisions-in-accounting-made-simple-meaning-and-types-explained/) . For example:

| Particulars | Amount |
| --- | --- |
| Plant and Machinery at Cost | ₹10,00,000 |
| Less: Accumulated Depreciation | ₹3,00,000 |
| Net Book Value | ₹7,00,000 |

## **Accumulated Depreciation vs Depreciation Expense**

| Basis | Depreciation Expense | Accumulated Depreciation |
| --- | --- | --- |
| Meaning | Depreciation charged for one accounting period | Total depreciation charged till date |
| Appears in | Profit and Loss Account | Balance Sheet or fixed asset schedule |
| Account type | Expense | Contra-asset |
| Balance | Debit | Credit |
| Reset every year? | Yes | No |
| Main purpose | Shows current year's asset usage cost | Shows total asset cost already written off |

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## **Accumulated Depreciation Formula**

### **Basic Formula**

Accumulated Depreciation = Original Cost of Asset - Net Book Value

### **Under Straight Line Method**

Annual Depreciation = (Cost of Asset - Residual Value) / Useful Life

Accumulated Depreciation = Annual Depreciation x Number of Years Used

### **Under Written Down Value Method**

Depreciation for the Year = Opening WDV x Depreciation Rate

Accumulated Depreciation = Original Cost - Closing WDV

## **Methods Used to Calculate Accumulated Depreciation**

### **Straight Line Method**

The [**Straight Line Method**](https://busy.in/accounting/depreciation-in-accounting-meaning-types-and-real-world-examples/) spreads depreciation evenly over the asset's useful life. It is useful when the asset provides similar benefits year after year, and the business wants a stable depreciation charge on the books.

From a reporting perspective, SLM is often easier to explain because the same amount is charged each year unless there is a change in useful life, residual value, or an [**accounting estimate**](https://busy.in/accounting/financial-accounting/) . This method works well for assets such as furniture, office equipment, and buildings where usage is generally steady over time.

For example: A business purchases a machine for ₹5,00,000. The useful life is 5 years, and the residual value is ₹50,000.

**Annual Depreciation = (₹5,00,000 - ₹50,000) / 5 = ₹90,000**

| Year | Opening Book Value | Depreciation | Accumulated Depreciation | Closing Book Value |
| --- | --- | --- | --- | --- |
| Year 1 | ₹5,00,000 | ₹90,000 | ₹90,000 | ₹4,10,000 |
| Year 2 | ₹4,10,000 | ₹90,000 | ₹1,80,000 | ₹3,20,000 |
| Year 3 | ₹3,20,000 | ₹90,000 | ₹2,70,000 | ₹2,30,000 |
| Year 4 | ₹2,30,000 | ₹90,000 | ₹3,60,000 | ₹1,40,000 |
| Year 5 | ₹1,40,000 | ₹90,000 | ₹4,50,000 | ₹50,000 |

After 5 years, the accumulated depreciation is ₹4,50,000, and the book value equals the residual value of ₹50,000.

### **Written Down Value Method**

The Written Down Value method applies depreciation to the opening written down value of the asset or block of assets. This means the depreciation amount is higher in the earlier years and gradually decreases as the asset's value declines.

In India, WDV is especially important for income tax depreciation, as depreciation is generally calculated block-wise at prescribed WDV rates. The official Income [**Tax depreciation**](https://busy.in/accounting/tax-accounting/) table also presents depreciation allowance as a percentage of the written-down value.

For example, let us take a computer purchased for ₹1,00,000. For income tax purposes, computers, including computer software, are listed at 40% WDV in Appendix I.

| Year | Opening WDV | Depreciation @ 40% | Accumulated Depreciation | Closing WDV |
| --- | --- | --- | --- | --- |
| Year 1 | ₹1,00,000 | ₹40,000 | ₹40,000 | ₹60,000 |
| Year 2 | ₹60,000 | ₹24,000 | ₹64,000 | ₹36,000 |
| Year 3 | ₹36,000 | ₹14,400 | ₹78,400 | ₹21,600 |
| Year 4 | ₹21,600 | ₹8,640 | ₹87,040 | ₹12,960 |

This shows how WDV gives higher depreciation in the first year and lower depreciation in later years.

### **Units of Production Method**

This method calculates depreciation based on [**actual usage or output**](https://busy.in/accounting/asset-turnover-ratio-how-efficiently-is-your-business-using-its-assets/) . It is useful where wear and tear depends more on production than time, such as certain factory machines.

### **Component Depreciation**

For companies, where a significant part of an asset has a different useful life from the remaining asset, that significant part may need separate depreciation. [**Schedule II**](https://busy.in/accounting/corporate-accounting-key-concepts-regulations-and-financial-reporting/) refers to separate useful life determination for significant parts of assets.

## **Journal Entry for Accumulated Depreciation**

When depreciation is recorded, the depreciation expense account is debited and accumulated depreciation is credited. This entry reduces profit through depreciation expense and reduces the asset’s carrying value through accumulated depreciation.

| Account | Debit | Credit |
| --- | --- | --- |
| Depreciation Expense A/c | ₹90,000 |  |
| To Accumulated Depreciation A/c |  | ₹90,000 |

**Narration:** Being depreciation charged on fixed asset for the year.

## **Entry When an Asset is Sold**

When an asset is sold, both the asset cost and accumulated depreciation must be removed from the books. If the asset is sold below its net book value, the difference is recorded as [**loss on sale of asset**](https://busy.in/accounting/what-is-the-accounting-cycle-a-comprehensive-guide/) . For instance, a machine was purchased for ₹5,00,000. Accumulated depreciation till the date of sale is ₹3,60,000. The machine is sold for ₹1,80,000.

**Net Book Value = ₹5,00,000 - ₹3,60,000 = ₹1,40,000**

**Profit on Sale = ₹1,80,000 - ₹1,40,000 = ₹40,000**

| Account | Debit | Credit |
| --- | --- | --- |
| Bank A/c | ₹1,80,000 |  |
| Accumulated Depreciation A/c | ₹3,60,000 |  |
| To Machine A/c |  | ₹5,00,000 |
| To Profit on Sale of Asset A/c |  | ₹40,000 |

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## **Accumulated Depreciation Under Indian Law**

### **Depreciation Under the Companies Act, 2013**

For companies, [Schedule II](https://upload.indiacode.nic.in/schedulefile?aid=AC_CEN_22_29_00008_201318_1517807327856&rid=9) of the Companies Act, 2013 provides useful lives for different types of assets. It says depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The residual value of an asset should normally not be more than 5% of the original cost unless a different value is supported with proper justification. **Common Useful Lives Under Schedule II**

| Asset Type | Useful Life |
| --- | --- |
| Plant and machinery, general | 15 years |
| Furniture and fittings, general | 10 years |
| Office equipment | 5 years |
| End-user devices such as desktops and laptops | 3 years |
| Servers and networks | 6 years |
| Motor cars not used on hire | 8 years |

Schedule II of the Companies Act, 2013 is generally followed by non- [**Ind AS companies**](https://busy.in/accounting/indian-accounting-standards-applicability-list/) for calculating depreciation based on prescribed useful lives and residual value assumptions.

Ind AS companies follow Ind AS 16 for property, plant and equipment. Under Ind AS 16, significant components of an asset may need to be depreciated separately if they have different useful lives. Ind AS 16 also requires reassessment of useful life, residual value, and depreciation method at least at each financial year-end.

### **Depreciation Under the Income Tax Act**

For tax purposes, depreciation was governed by [Section 32](https://www.incometaxindia.gov.in/w/section-32-77)  of the Income-tax Act, 1961 for earlier tax years. From tax years beginning on or after 1 April 2026, the corresponding provision is Section 33 of the Income-tax Act, 2025.

It applies to tangible assets such as buildings, machinery, plant and furniture, and specified [**intangible assets**](https://busy.in/accounting/what-is-goodwill-in-accounting-definition-valuation-and-treatment/) such as know-how, patents, copyrights, trademarks, licences, franchises and similar business or commercial rights, excluding goodwill of a business or profession. The income-tax law generally uses the block of assets concept. Depreciation is calculated on the written down value of the block at prescribed rates.

### **Common Income Tax Depreciation Rates (as per the official Income Tax Appendix I, uploaded on 05/05/2026)**

| Asset Block | WDV Rate |
| --- | --- |
| Residential buildings | 5% |
| Other buildings | 10% |
| Furniture and fittings | 10% |
| General plant and machinery | 15% |
| Motor cars not used on hire | 15% |
| Motor buses, lorries and taxis used on hire | 30% |
| Computers including computer software | 40% |
| Intangible assets such as patents, trademarks and licences | 25% |

## **What Happens When an Asset is Fully Depreciated?**

An asset is fully depreciated when its book value has been reduced to its residual value or nil value, depending on the applicable [**accounting policy**](https://busy.in/accounting/accounting-policies-what-they-are-and-why-they-matter-in-financial-reporting/) . Such asset can still be used in the business. Depreciation stops, but the asset is not automatically removed from the books. It is removed only when it is sold, scrapped, discarded or otherwise derecognised. Moreover, if the business is still using the computer, it can remain in the fixed asset register even though no further depreciation is charged.

### **Example**

| Particulars | Amount |
| --- | --- |
| Computer at Cost | ₹1,00,000 |
| Less: Accumulated Depreciation | ₹1,00,000 |
| Net Book Value | Nil |

## **Common Mistakes to Avoid**

### **Treating Accumulated Depreciation as a Liability**

Accumulated depreciation is not payable to anyone. It is only a [**contra-asset account**](https://busy.in/accounting/accounting-concepts-every-business-owner-should-know/) used to reduce the [**carrying value**](https://busy.in/accounting/balance-sheet-basics-definition-format-and-key-elements/) of fixed assets.

### **Using the Same Rate for Books and Tax**

Book depreciation and tax depreciation may be different. Companies may calculate book depreciation based on useful life under Schedule II, while tax depreciation is calculated using prescribed WDV rates under the applicable Income-tax Act.

### **Ignoring the 180-Day Rule for Tax Depreciation**

If an asset is bought and put to use for less than 180 days in the year, only 50% of the normal depreciation is allowed for [**income tax purposes**](https://busy.in/accounting/taxation-in-accounting-basics-types-of-taxes-and-compliance-essentials/) .

### **Forgetting to Reverse Accumulated Depreciation on Sale**

When an asset is sold or scrapped, the accumulated depreciation related to that asset must also be removed from the books.

### **Depreciating Land**

Land is generally not depreciated because it normally does not have a limited useful life. However, land improvements or leasehold improvements may require separate accounting depending on the facts.

## **Conclusion**

Accumulated depreciation helps a business show a more realistic book value of its fixed assets. It records how much of an asset’s cost has already been charged as depreciation over time.

For Indian businesses, depreciation should not be understood only from an accounting angle. Companies need to consider Schedule II of the Companies Act for book depreciation. For tax purposes, depreciation was calculated under Section 32 of the Income-tax Act, 1961 for earlier tax years, while from tax years beginning on or after 1 April 2026, it is covered under Section 33 of the Income-tax Act, 2025 using prescribed WDV rates and the block of assets concept.

The safest approach is to maintain a proper fixed asset register, select the right depreciation method, apply the correct useful life or tax rate, and pass depreciation entries regularly. This keeps the balance sheet cleaner, supports [**tax compliance**](https://busy.in/accounting/gst-compliant-bookkeeping-best-practices/) , and makes audits easier.

## About the author

**Vineet Goyal**

I am a chartered accountant with over 14 years of experience. I understand income tax, GST, and balancing financial records. I analyze financial statements and tax codes effectively. However, I also have a passion for writing, which is different from working with numbers. Recently, I started writing articles and blog posts. My goal is to make finance easier for everyday people to understand.

## Frequently asked questions

### Is accumulated depreciation a debit or credit?

Accumulated depreciation normally has a credit balance. It is credited every time depreciation is recorded.

### Is accumulated depreciation shown in the Profit and Loss Account?

No. Depreciation expense is shown in the Profit and Loss Account. Accumulated depreciation is shown in the balance sheet or fixed asset schedule as a deduction from fixed assets.

### Can accumulated depreciation be more than the asset cost?

Normally, no. Accumulated depreciation should not exceed the depreciable amount of the asset. Depreciation usually stops once the asset reaches its residual value or nil carrying value.

### Does accumulated depreciation affect cash flow?

Accumulated depreciation itself does not involve cash outflow. Depreciation is a non-cash expense. However, depreciation may reduce taxable profit, which can affect tax cash flow.

### What happens to accumulated depreciation when an asset is sold?

The accumulated depreciation account is debited and [**removed from the books**](https://busy.in/accounting/ledger-in-accounting/) along with the original asset cost. The difference between sale value and net book value is recorded as profit or loss on sale.

### Is accumulated depreciation calculated separately for each asset?

For book accounting, it is usually tracked asset-wise in the fixed asset register. For income-tax depreciation in India, depreciation is generally calculated block-wise under the applicable Income-tax Act. For tax years beginning on or after 1 April 2026, the relevant depreciation provision is Section 33 of the Income-tax Act, 2025.

### Is depreciation charged on land?

Land is generally not depreciated because it usually has an unlimited useful life. Buildings, machinery, furniture, vehicles, computers and similar assets are depreciable.

### What is the difference between accumulated depreciation and WDV?

Accumulated depreciation is the total depreciation charged till date. WDV, or written down value, is the remaining book value after reducing accumulated depreciation from the original cost.

### What is the half-year rule for depreciation?

For income tax purposes, if an asset is put to use for less than 180 days in the year of acquisition, only 50% of the normal depreciation is allowed for that year.

### Does accounting software calculate accumulated depreciation?

[Accounting software](https://busy.in/accounting-software/) can help maintain fixed asset records, calculate depreciation based on selected methods, and record depreciation entries. This reduces manual calculation errors and makes audit preparation easier.

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