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 . 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 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:

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 . 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.

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 , property, plant and equipment under the cost model is carried at cost less accumulated depreciation and accumulated impairment losses . For example:

Accumulated Depreciation vs Depreciation Expense

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 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 . 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

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 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.

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 . 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 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.

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 . 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

Accumulated Depreciation Under Indian Law

Depreciation Under the Companies Act, 2013

For companies, Schedule II 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

Schedule II of the Companies Act, 2013 is generally followed by non- Ind AS companies 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  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 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)

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 . 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

Common Mistakes to Avoid

Treating Accumulated Depreciation as a Liability

Accumulated depreciation is not payable to anyone. It is only a contra-asset account used to reduce the carrying value 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 . 

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 , and makes audits easier.