---
title: "Depreciation in Accounting: Types, Methods & Examples"
description: "Learn depreciation in accounting- straight-line, declining balance & units of production methods, formulas, book value vs salvage value and what causes deprecia"
canonical: "https://busy.in/accounting/depreciation-in-accounting-meaning-types-and-real-world-examples/"
author: "Madan Murari"
published: "2025-05-15T06:55:41.000Z"
category: "Accounting"
---

-   Depreciation is the systematic allocation of a tangible fixed asset's cost over its useful life, matching the expense to the periods in which the asset helps generate revenue.
-   The main causes of depreciation are physical deterioration, functional obsolescence, and economic or external obsolescence.
-   The 5 main depreciation methods are Straight-Line Method (SLM), Written Down Value / Declining Balance (WDV), Double Declining Balance (DDB), Units of Production, and Sum-of-Years'-Digits (SYD).
-   Under the Companies Act 2013, Schedule II uses prescribed useful lives rather than old fixed statutory rates. Residual value is ordinarily capped at 5% of original cost unless properly justified and disclosed. Both SLM and WDV are permitted.
-   Under the Income Tax Act, depreciation is generally computed on the WDV method through the block of assets system. If an asset is put to use for fewer than 180 days in the year of acquisition, only 50% of normal depreciation is allowed for that year. Certain power-generating undertakings may use SLM in the permitted manner.
-   Land is not depreciable. Goodwill is also not eligible for tax depreciation from AY 2021-22 onward.
-   Accumulated depreciation is a contra-asset account on the balance sheet. It reduces gross asset cost to arrive at net book value.
-   Depreciation affects all three financial statements. It reduces profit in the P&L, reduces carrying value on the balance sheet, and is added back in the operating section of the cash flow statement because it is a non-cash expense.
-   For accounting, depreciation mainly applies to tangible assets. Intangible assets are generally amortized, while specified intangible assets are also eligible for tax depreciation under Section 32, except goodwill.
-   When a depreciable asset is sold, Section 50 governs the capital gains computation under the block system. Sale proceeds usually reduce the block's WDV, but short-term capital gain can arise where the statutory conditions are met.

# Depreciation in Accounting: Methods and Types

## What Is Depreciation?

Depreciation is the systematic, non-cash allocation of a tangible fixed asset's cost over its estimated useful life. It represents the portion of an asset's cost consumed in generating revenue during a given accounting period, matching the cost of using the asset to the income it helps produce.

### **Core depreciation formula**

**Depreciable Amount = Asset Cost - Salvage (Residual) Value**
**Annual Depreciation = Depreciable Amount ÷ Useful Life** under SLM

**Example:** A delivery truck purchased for ₹6,00,000 with an estimated scrap value of ₹1,00,000 and a 5-year useful life has a depreciable amount of ₹5,00,000 and annual depreciation of ₹1,00,000 under the straight-line method.

Depreciation does not mean the business is physically setting money aside every year. It is an accounting allocation. The cash outflow already happened when the asset was purchased. Depreciation spreads that cost across the periods that benefit from using the asset.

## **What Causes Depreciation?**

Assets lose value for different reasons. Understanding the cause matters because it affects which method best reflects how the asset's economic benefit is actually consumed.

| Cause | Definition | Examples | Best Reflected By |
| --- | --- | --- | --- |
| Physical Deterioration | Wear and tear from use, exposure to weather, corrosion, or decay | Machinery, vehicles, buildings | SLM or WDV |
| Functional Obsolescence | Asset becomes technologically inadequate or inefficient before it physically wears out | Computers replaced by faster models, outdated manufacturing lines | Accelerated methods like DDB or SYD |
| Economic / External Obsolescence | Loss of value due to external factors such as regulation, market shifts, or location decline | A factory impacted by new regulations, a building in a declining industrial zone | Often impairment rather than routine depreciation |

### **Why the cause matters**

If an asset delivers broadly even benefit every year, SLM is often appropriate. If it loses economic value quickly in the early years, an accelerated method may better reflect reality. If the fall in value is sudden and caused by external events, the correct treatment may not be ordinary depreciation at all. It may require an impairment review.

**Example:**
A delivery van may mainly depreciate because of physical wear. A laptop may lose value mainly because it becomes outdated quickly. A factory building may suddenly lose economic usefulness because of a regulatory ban or a market collapse in the area. These are not the same pattern of consumption, so they should not always be handled with the same logic.

## **Which Assets Cannot Be Depreciated?**

Not all assets qualify for depreciation. The following are generally non-depreciable under Indian accounting and tax practice.

| Asset | Why Not Depreciated |
| --- | --- |
| Land | It normally does not have a finite useful life |
| Goodwill (for tax purposes) | Not eligible for depreciation under the Income Tax Act from AY 2021-22 onward |
| Investments | Valued at cost, fair value, or impairment basis, not depreciated like fixed assets |
| Current assets | Inventory and receivables are short-term assets; losses are handled through write-downs or provisions |
| Assets held for sale | Once classified as held for sale under Ind AS 105, depreciation generally stops |
| Fully depreciated assets still in use | No further depreciation is charged once the depreciable amount is exhausted |

### **Practical notes**

-   Land is ordinarily not depreciated because it does not usually get consumed over a finite useful life. However, land improvements may be treated differently depending on their nature.
-   Fully depreciated assets can remain in use for years. That does not mean the depreciation is wrong. It simply means the asset has already been allocated down to its residual value or nil depreciable amount under the chosen accounting policy.
-   Goodwill needs special care. For tax purposes, it is no longer depreciable. For accounting under Ind AS, goodwill arising on business combination is not amortized and is instead tested annually for impairment.

## **5 Depreciation Methods Explained**

Different methods suit different patterns of asset use. No single method is universally best. The correct method is the one that most faithfully reflects how the asset's economic benefit is consumed.

### **Straight-Line Method (SLM)**

The [**Straight-Line Method**](https://busy.in/accounting/accumulated-depreciation-meaning-formula-and-practical-example/) is the most widely used depreciation method. It charges an equal amount of depreciation every year over the asset's useful life.

### **Formula**

**Annual Depreciation = (Asset Cost - Salvage Value) ÷ Useful Life**

### **₹ Example**

Laptop purchased for ₹60,000, salvage value ₹6,000, useful life 3 years.

Depreciable amount = ₹60,000 - ₹6,000 = ₹54,000
Annual depreciation = ₹54,000 ÷ 3 = ₹18,000 per year

### **Year-by-year schedule**

| Year | Opening Book Value | Depreciation | Closing Book Value |
| --- | --- | --- | --- |
| 1 | ₹60,000 | ₹18,000 | ₹42,000 |
| 2 | ₹42,000 | ₹18,000 | ₹24,000 |
| 3 | ₹24,000 | ₹18,000 | ₹6,000 (= Salvage) |

### **Best for**

Buildings, furniture, office equipment, and other assets that provide relatively uniform benefit across their life.

### **Strengths of SLM**

SLM is easy to understand, easy to audit, and easy to forecast. Because the yearly charge stays constant, budgeting and profitability analysis also become simpler.

### **Limitation of SLM**

SLM may not reflect reality well for assets that lose efficiency or value much faster in the early years. For example, high-tech equipment often becomes outdated quickly, so equal annual depreciation may understate early-year consumption.

## **Written Down Value / Declining Balance Method**

Under WDV, a fixed percentage is applied to the reducing book value each year. This is the main tax depreciation framework under the Income Tax Act.

### **Formula**

**Annual Depreciation = WDV Rate × Opening Book Value of the Year**

### **Example**

Machine purchased for ₹1,00,000, WDV rate 20%.

| Year | Opening WDV | Depreciation (20%) | Closing WDV |
| --- | --- | --- | --- |
| 1 | ₹1,00,000 | ₹20,000 | ₹80,000 |
| 2 | ₹80,000 | ₹16,000 | ₹64,000 |
| 3 | ₹64,000 | ₹12,800 | ₹51,200 |
| 4 | ₹51,200 | ₹10,240 | ₹40,960 |
| 5 | ₹40,960 | ₹8,192 | ₹32,768 |

### **Why businesses use WDV**

WDV charges more depreciation in the early years and less in later years. That often matches economic reality better for machines, vehicles, and technology assets that are most useful or most valuable when new.

### **Best for**

Machinery, vehicles, electronics, and other assets that lose value faster when new and tend to require more maintenance as they age.

### **Important note**

Under WDV, the value declines faster in the beginning and more slowly later. In a simple mathematical schedule, it does not usually hit zero. Under tax law, this matters less because depreciation is computed block-wise rather than asset-wise.

## **Double Declining Balance Method (DDB)**

DDB is a more aggressive accelerated method that applies double the straight-line rate to the opening book value.

### **Formula**

**DDB Rate = 2 ÷ Useful Life (in years)**
**Annual Depreciation = Opening Book Value × DDB Rate**

DDB does not deduct salvage value while computing each year's charge, but the final carrying amount should not fall below salvage value.

### **Example**

Machine purchased for ₹1,00,000, 5-year life, salvage value ₹10,000.

DDB Rate = 2 ÷ 5 = 40% per year

| Year | Opening Book Value | DDB Depreciation (40%) | Adjusted Charge | Closing Book Value |
| --- | --- | --- | --- | --- |
| 1 | ₹1,00,000 | ₹40,000 | ₹40,000 | ₹60,000 |
| 2 | ₹60,000 | ₹24,000 | ₹24,000 | ₹36,000 |
| 3 | ₹36,000 | ₹14,400 | ₹14,400 | ₹21,600 |
| 4 | ₹21,600 | ₹8,640 | ₹8,640 | ₹12,960 |
| 5 | ₹12,960 | ₹5,184 | ₹2,960 | ₹10,000 (= Salvage) |

### **Best for**

Technology assets such as computers, servers, and software-embedded machinery that lose economic value quickly in the first few years.

### **When DDB makes sense**

DDB is useful when management wants the accounting pattern to strongly reflect early-year consumption. It is more aggressive than normal WDV and is often used in conceptual comparisons or internal analysis, even though Indian tax depreciation follows statutory WDV block rates rather than DDB.

## **Units of Production Method**

Under this method, depreciation is tied directly to actual usage - units produced, hours operated, or kilometers driven.

### **Formula**

**Depreciation per Unit = (Asset Cost - Salvage Value) ÷ Total Lifetime Units**
**Annual Depreciation = Depreciation per Unit × Units Produced This Year**

### **Example**

Manufacturing machine purchased for ₹2,00,000, salvage ₹20,000, lifetime production capacity 1,80,000 units.

Depreciation per unit = ₹1,80,000 ÷ 1,80,000 = ₹1 per unit

| Year | Units Produced | Annual Depreciation | Closing Book Value |
| --- | --- | --- | --- |
| 1 | 40,000 | ₹40,000 | ₹1,60,000 |
| 2 | 50,000 | ₹50,000 | ₹1,10,000 |
| 3 | 35,000 | ₹35,000 | ₹75,000 |
| 4 | 30,000 | ₹30,000 | ₹45,000 |
| 5 | 25,000 | ₹25,000 | ₹20,000 (= Salvage) |

### **Best for**

Mining equipment, printing presses, vehicles measured by kilometers, and production machinery where output can be measured reliably.

### **Key advantage**

This method is often the most realistic where usage varies sharply from year to year. A machine producing heavily in one year and lightly in another should not always carry the same annual charge if the economic benefit clearly depends on output.

### **Key limitation**

This method depends on reliable usage data. If units, hours, or kilometers are not measured accurately, the method becomes unreliable. It may also produce a very low or nil charge in low-usage periods, which is not always desirable unless that truly reflects the benefit pattern.

## **Sum-of-Years'-Digits Method (SYD)**

SYD is an accelerated method that uses a declining fraction based on the remaining useful life of the asset.

### **Formula**

**SYD = N × (N + 1) ÷ 2**
**Annual Depreciation = (Remaining Life ÷ SYD) × Depreciable Amount**

### **Example**

Asset cost ₹50,000, salvage ₹5,000, 5-year life.

Depreciable amount = ₹45,000
SYD = 5 × 6 ÷ 2 = 15

| Year | Fraction | Annual Depreciation | Closing Book Value |
| --- | --- | --- | --- |
| 1 | 5/15 | ₹15,000 | ₹35,000 |
| 2 | 4/15 | ₹12,000 | ₹23,000 |
| 3 | 3/15 | ₹9,000 | ₹14,000 |
| 4 | 2/15 | ₹6,000 | ₹8,000 |
| 5 | 1/15 | ₹3,000 | ₹5,000 (= Salvage) |

### **Best for**

Vehicles and high-tech equipment that provide stronger benefit in early years but where you want a smoother accelerated profile than DDB.

### **Why some accountants like SYD**

SYD is more front-loaded than SLM but less aggressive than DDB. It is often seen as a middle ground where accelerated depreciation is justified but management does not want the sharp early-year drop that DDB produces.

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## **How to Choose the Right Depreciation Method**

Choosing the right method is not just an accounting preference. It affects profit trends, asset carrying values, tax timing, and how realistically the accounts reflect asset use.

| Situation | Recommended Method | Reason |
| --- | --- | --- |
| Buildings, furniture, office equipment | SLM | Uniform benefit across life; simple and stable |
| Tax-driven decision, machinery, vehicles | WDV | Required for most tax computations; gives higher early deductions |
| Fast-depreciating technology | DDB | Front-loads cost fastest |
| Variable-output manufacturing equipment | Units of Production | Matches depreciation to actual usage |
| Accelerated without DDB aggressiveness | SYD | Moderate front-loading |
| Companies Act compliance | SLM or WDV | Both permitted; choose based on usage pattern |
| Income Tax computation | WDV for most assets | Required through the block system |

From a [**management accounting**](https://busy.in/accounting/management-accounting/) perspective, the choice of depreciation method is not just a compliance decision; it directly affects reported profit margins, return-on-asset ratios, and how the business looks to lenders and investors across different years.

### **Thumb rule**

A common Indian practice is to use Schedule II based depreciation for [**financial reporting**](https://busy.in/glossary/financial-reporting/) and Section 32 WDV for tax computation. The resulting timing difference is then tracked through deferred tax accounting.

Indian businesses using [**accounting software**](https://busy.in/accounting-software/) can configure their chosen depreciation method from day one ensuring every asset addition, disposal, and annual charge is calculated consistently, posted automatically, and reflected correctly across all three financial statements.

### **Questions to ask before choosing a method**

-   Does the asset provide equal benefit every year or more benefit in the early years?
-   Is actual usage measurable and reliable?
-   Is the objective statutory reporting, management reporting, or tax computation?
-   Will the method still make sense if the asset is lightly used in some years?
-   Does the chosen method align with the asset class and the accounting policy note?

## **Accumulated Depreciation: The Balance Sheet Entry**

Accumulated depreciation is the total depreciation charged on an asset from the date of purchase to the current reporting date. It is not an expense account. It is a [**contra-asset account**](https://busy.in/accounting/comprehensive-guide-to-contra-entry/) that reduces the gross value of the fixed asset on the balance sheet.

**Net Book Value = Gross Asset Cost - Accumulated Depreciation**

This directly ties into the [**accounting equation**](https://busy.in/accounting/accounting-equation/) , as accumulated depreciation grows, the asset side of the balance sheet shrinks, which is mirrored through reduced retained earnings on the equity side.

### **Balance sheet presentation**

| Fixed Assets | Amount |
| --- | --- |
| Plant & Machinery - Gross Cost | ₹5,00,000 |
| Less: Accumulated Depreciation | (₹2,00,000) |
| Net Book Value | ₹3,00,000 |

### **How accumulated depreciation builds over time**

Asset: ₹5,00,000 machine, SLM, ₹50,000 salvage, 5-year life
Annual depreciation = ₹90,000

| Year | Annual Depreciation | Accumulated Depreciation | Net Book Value |
| --- | --- | --- | --- |
| 1 | ₹90,000 | ₹90,000 | ₹4,10,000 |
| 2 | ₹90,000 | ₹1,80,000 | ₹3,20,000 |
| 3 | ₹90,000 | ₹2,70,000 | ₹2,30,000 |
| 4 | ₹90,000 | ₹3,60,000 | ₹1,40,000 |
| 5 | ₹90,000 | ₹4,50,000 | ₹50,000 (= Salvage) |

### **Key points**

-   Accumulated depreciation has a credit balance.
-   It appears alongside the fixed asset and reduces gross cost to arrive at carrying amount.
-   When an asset is fully depreciated, accumulated depreciation equals the depreciable amount.
-   When the asset is sold or scrapped, both gross cost and accumulated depreciation are removed from the books.

### **Journal entry perspective**

Each year the journal entry follows the [**golden rules of accounting**](https://busy.in/accounting/golden-rules-of-accounting/) :

**Dr Depreciation Expense**
**Cr Accumulated Depreciation**

On disposal, accumulated depreciation is reversed out along with the asset's gross cost.

## **Depreciation Under Companies Act 2013 - Schedule II**

Every company incorporated in India must depreciate assets in accordance with Schedule II of the Companies Act 2013. This framework is based on **useful life**, not old fixed statutory rates. Residual value is ordinarily not more than 5% of original cost unless properly justified and disclosed. Both SLM and WDV are permitted.

### **Key rules**

-   Schedule II prescribes useful life for each asset class, not standard depreciation rates.
-   Residual value is ordinarily capped at 5% of original cost unless technical justification is disclosed.
-   Both SLM and WDV are permitted.
-   Multi-shift adjustment applies where relevant under Schedule II notes. If an asset is used in double shift, depreciation for that period is increased by 50%. If used in triple shift, depreciation for that period is increased by 100%.
-   If a significant component of an asset has a materially different useful life, it should be depreciated separately.
-   If a company can demonstrate, with technical support, that actual useful life differs from Schedule II, it may use the different life with disclosure of the variation and its effect.

### **Useful Lives Under Schedule II (selected asset classes)**

| Asset Category | Useful Life (Years) | Notes |
| --- | --- | --- |
| Buildings - RCC Frame | 60 | Most commercial / industrial RCC buildings |
| Buildings - Other than RCC | 30 | Brick and non-RCC structures |
| Plant & Machinery (general) | 15 | Standard manufacturing equipment |
| Plant & Machinery (continuous process) | 25 | Process industries |
| Computers and peripherals | 3 | Laptops, desktops, printers |
| Servers and networks | 6 | Server-grade hardware |
| Motor vehicles (not for hire) | 8 | Cars and similar business-use vehicles |
| Office equipment | 5 | Copiers, scanners, fax-type equipment |
| Furniture and fittings | 10 | Desks, chairs, shelving |
| Electrical installations | 10 | Wiring, transformers, generators |

### **Important note on intangible assets**

For accounting, intangible assets are governed by their own standard and are amortized over their estimated useful life if finite. Indefinite-life intangibles are not amortized.

### **Practical implication for companies**

Under the Companies Act, depreciation is not just about picking a rate from a table anymore. Management must think about useful life, residual value, component accounting, and disclosure. That makes the process more judgment-based than it was under the old Schedule XIV style rate system.

## **Depreciation Under Income Tax Act - Section 32**

For tax purposes, depreciation is governed by [Section 32 of the Income Tax Act](https://cag.gov.in/uploads/download_audit_report/2014/Union_Performance_Direct_Tax_Revenue_Dept_Allowance_Depreciation_Amortisation_20_2014_chapter_7.pdf) . The tax framework differs significantly from the Companies Act approach.

### **Key features of Section 32 depreciation**

#### **1\. WDV Method is generally mandatory**

Unlike the Companies Act, the Income Tax Act generally uses the Written Down Value method through block rates. Certain power-generating undertakings may use SLM in the manner allowed by law.

#### **2\. Block of Assets**

Assets are not normally depreciated individually for tax purposes. Assets of the same class and rate are grouped into a block, and depreciation is computed on the block's WDV.

This means that tax depreciation is not concerned with a separate asset-by-asset yearly schedule in the same way as financial reporting. Additions and disposals affect the block, and the block is what matters.

#### **3\. The 180-Day Rule**

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.

**Example:**
A computer purchased for ₹1,00,000 and put to use on 15 January, with a 40% depreciation rate:

Normal depreciation = ₹40,000
Allowed in Year 1 = ₹20,000
Closing WDV = ₹80,000

#### **4\. Additional Depreciation**

Eligible taxpayers engaged in manufacture or production, and certain eligible taxpayers in the power sector, can claim additional depreciation on new plant and machinery under Section 32(1)(iia), subject to conditions and exclusions.

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### **Common IT Act depreciation rates**

| Block / Asset Category | WDV Rate |
| --- | --- |
| Buildings - Residential | 5% |
| Buildings - Non-residential | 10% |
| Furniture and fittings | 10% |
| Plant & Machinery (general) | 15% |
| Motor vehicles (not for hire) | 15% |
| Motor vehicles (for hire) | 30% |
| Computers and computer software | 40% |
| Books used by professionals | 40% |
| Intangible assets such as patents, trademarks, know-how, licences, franchises, copyrights | 25% |
| Air pollution control equipment | 40% |
| Goodwill | Not eligible |
| Land | Not eligible |

### **Tax vs accounting depreciation**

Tax depreciation and accounting depreciation often differ sharply.

**Example:**
A company may depreciate a computer over 3 years under Schedule II for books, but claim tax depreciation at the applicable WDV rate for tax. Because the yearly figures differ, book profit and taxable profit also differ. This difference creates a timing difference that may lead to deferred tax liability or deferred tax asset.

### **Why this matters in practice**

This is why many businesses maintain two parallel depreciation schedules:

-   one for audited financial statements
-   one for income tax computation

## **WDV vs. SLM: The Indian Business Comparison**

This is one of the most common practical depreciation questions for Indian businesses.

| Dimension | SLM (Straight-Line Method) | WDV (Written Down Value) |
| --- | --- | --- |
| Depreciation amount | Equal every year | Higher in early years, lower later |
| Calculation base | Original cost less salvage | Opening book value each year |
| Book value at end | Reaches salvage value exactly | Declines progressively |
| Tax advantage | Equal deductions over time | Higher early deductions |
| Best suited for | Buildings, furniture, office equipment | Machinery, vehicles, computers, tech assets |
| Financial reporting effect | Higher early-year profit | Lower early-year profit |
| Allowed under Companies Act | Yes | Yes |
| Required under IT Act | Generally no | Yes for most cases |

### **Practical comparison**

SLM is easier for budgeting and profit analysis because the yearly charge is stable. WDV is often seen as more realistic for fast-depreciating assets and more useful from a tax timing perspective because it gives larger deductions in earlier years.

### **Indian business reality**

Many companies maintain two depreciation schedules:

-   one for financial reporting under the Companies Act
-   one for tax under Section 32

That is normal. The key is not to mix the two.

## **Selling a Depreciable Asset - Section 50 of the IT Act**

When you sell a fixed asset on which depreciation has been claimed under the Income Tax Act, capital gains are computed under Section 50 within the block framework.

### **How it works**

#### **Scenario 1: Only some assets from the block are sold**

Sale proceeds usually reduce the block's WDV. However, if the money received on transfer exceeds the opening WDV of the block plus actual cost of additions during the year, after transfer expenses, the excess can become short-term capital gain.

#### **Scenario 2: Entire block is eliminated**

If all assets in the block are transferred and no asset remains in that block at year-end, capital gain or loss is worked out under Section 50 based on the block rules.

### **Example**

Opening WDV of block on 1 April = ₹4,00,000
Block contains only one machine
Machine sold for ₹5,50,000

If no asset remains in the block, the excess can be treated as short-term capital gain under Section 50.

### **Key point**

Gain on depreciable assets under Section 50 is treated as short-term capital gain even if the asset was held for a long time.

### **Common error to avoid**

Do not apply the normal long-term capital gains logic to a depreciable block asset under Section 50. This is one of the most common mistakes in practical tax understanding.

## **How Depreciation Affects Your Financial Statements**

Depreciation affects all three financial statements at the same time.

### **Income Statement (P&L)**

Depreciation is charged as an expense and reduces profit before tax.

-   SLM gives a similar reduction every year
-   WDV, DDB, and SYD reduce profit more in early years
-   Where tax law allows deduction, depreciation lowers taxable income and creates a tax shield

Each year's depreciation charge reduces profit before tax, which in turn lowers retained earnings, a core component of [**equity in accounting**](https://busy.in/accounting/equity-in-accounting/) on the balance sheet.

### **Balance Sheet**

The carrying amount of fixed assets falls over time because accumulated depreciation is deducted from gross cost.

-   Accelerated methods produce lower carrying values in earlier years
-   After the depreciable amount is exhausted, the asset remains at residual value until sold, scrapped, or otherwise derecognized

### **Cash Flow Statement**

Depreciation is a non-cash expense.

Under the indirect method:

**Net Profit**
**Add: Depreciation**
**\= Cash generated from operations before working capital changes**

Depreciation is added back because it reduced accounting profit without reducing current-period cash.

### **Summary Table**

| Financial Statement | Effect of Depreciation | Key Implication |
| --- | --- | --- |
| Income Statement (P&L) | Reduces profit before tax | Affects profitability and tax |
| [**Balance Sheet**](https://busy.in/accounting/balance-sheet-basics-definition-format-and-key-elements/) | Reduces carrying value via accumulated depreciation | Lowers net asset value |
| Cash Flow Statement | Added back under indirect method | Non-cash charge |

[**Financial accounting software**](https://busy.in/accounting-software/financial-accounting/) that applies Schedule II or Section 32 rates automatically, tracks the timing difference between book and tax depreciation, and keeps deferred tax calculations audit-ready without a manual year-end reconciliation.

### **Why this matters to management**

A business can show lower accounting profit because of high depreciation and still generate healthy operating cash flow. This is common in capital-intensive businesses such as manufacturing, warehousing, logistics, and infrastructure.

## **Depreciation vs. Amortization**

Depreciation and [**amortization**](https://busy.in/accounting/types-of-accounts-in-accounting-and-how-amortization-affects-them/) are both non-cash cost-allocation mechanisms, but they are usually applied to different asset types.

| Dimension | Depreciation | Amortization |
| --- | --- | --- |
| Asset type | Tangible fixed assets | Intangible assets |
| Standard | Ind AS 16 / AS 10 | Ind AS 38 / AS 26 |
| Methods | SLM, WDV, DDB, Units of Production, SYD | Usually straight-line, or another method that reflects the benefit pattern |
| Salvage value | May apply | Often nil, but not always impossible |
| Useful life | Based on asset usage and legal framework | Finite-life intangibles are amortized; indefinite-life intangibles are not |
| Tax treatment | Section 32 | Specified intangibles also covered under Section 32 |

For accounting, [**tangible assets**](https://busy.in/glossary/assets-definition-and-types/) are generally depreciated and intangibles are generally amortized. For tax, specified intangible assets may still receive depreciation treatment under Section 32. Goodwill is excluded for tax depreciation.

## **Impairment vs. Depreciation**

Both impairment and depreciation reduce carrying amount, but they are fundamentally different.

| Dimension | Depreciation | Impairment |
| --- | --- | --- |
| Nature | Systematic and recurring | Event-driven and one-time in nature |
| Trigger | Passage of time or usage | Carrying amount exceeds recoverable amount |
| Frequency | Every reporting period | When impairment indicators exist |
| Calculation | Based on depreciation method | Based on recoverable amount |
| Reversible | Routine depreciation is not reversed | Impairment may be reversed in some cases under Ind AS 36 |
| Standard | Ind AS 16 / AS 10 | Ind AS 36 / AS 28 |

### **Practical example**

A printing press may be depreciated at ₹2,00,000 per year under SLM. If the company later shuts down print operations and the recoverable amount drops sharply, the asset may need an impairment test and an immediate impairment loss.

### **Simple way to remember the difference**

Depreciation is planned and happens because time passes or the asset is used.
Impairment is triggered and happens because something has gone wrong or changed materially.

## **Conclusion**

Depreciation is not just a compliance exercise. It affects tax liability, reported profit, carrying value of assets, long-term capital planning, and how the business presents its financial position.

The six depreciation decisions every Indian business should review carefully are:

-   Method for accounting under the Companies Act
-   Useful life and whether Schedule II lives are appropriate
-   Residual value and whether extra disclosure is needed
-   Method and rates for tax under Section 32
-   Timing differences between book and tax depreciation
-   Correct treatment of asset sale under Section 50

A good finance process should help you maintain parallel depreciation schedules for books and tax, track accumulated depreciation, apply the 180-day rule correctly, support the fixed assets register, and avoid mistakes at the time of disposal.

## About the author

**Madan Murari**

Hi there! I’m a Chartered Accountant with over 20 years of experience in financial accounting and a passion for writing. I enjoy simplifying complex topics like GST and income tax, believing that learning should be a lifelong journey. I'm here to share insights and make financial matters easier for everyone!

## Frequently asked questions

### What is the difference between the WDV method and the declining balance method?

In Indian practice, WDV and declining balance refer to the same reducing-balance concept. DDB is a more aggressive variant using exactly 2 times the straight-line rate.

### Is it mandatory to use WDV for Income Tax in India?

For most taxpayers, yes. Certain power-generating undertakings may use SLM in the permitted manner.

### What is the residual value cap under the Companies Act 2013?

Schedule II ordinarily caps residual value at 5% of original cost unless a different value is technically justified and disclosed.

### What is the 180-day rule for depreciation under the IT Act?

If an asset is put to use for fewer than 180 days in the year of acquisition, only 50% of normal depreciation is allowed in that year.

### What is accumulated depreciation and where does it appear on the balance sheet?

It is the total depreciation charged to date and is shown as a deduction from gross asset cost.

### What is the difference between depreciation and amortization?

Depreciation mainly applies to tangible fixed assets, while amortization is the corresponding concept for intangible assets.

### Can goodwill be depreciated in India?

Not for tax purposes from AY 2021-22 onward. Accounting treatment of goodwill also differs from ordinary amortization.

### How does depreciation affect the cash flow statement?

It reduces accounting profit but not cash, so it is added back under the indirect method.

### What happens when a depreciable asset is sold under the Income Tax Act?

Section 50 applies. Sale proceeds affect the block, and short-term capital gain may arise depending on the block position.

### What is the difference between impairment and depreciation?

Depreciation is planned and recurring. Impairment is event-driven and arises when carrying amount exceeds recoverable amount.

### Which depreciation method should a manufacturing company use?

For financial reporting, SLM or WDV may both be appropriate depending on the usage pattern. For tax, WDV generally applies.

### What is the Double Declining Balance method and how does it differ from WDV?

DDB uses exactly 2 times the straight-line rate. WDV under tax law uses prescribed statutory rates, not necessarily 2 times SLM.

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