Depreciation in Accounting: Methods and Types

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.

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 A laptop may lose value mainly because it becomes outdated quickly.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.

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 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

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%.

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

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

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

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.

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.

From a 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 and Section 32 WDV for tax computation. The resulting timing difference is then tracked through deferred tax accounting.

Indian businesses using 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 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 , 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

How accumulated depreciation builds over time

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

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 :

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)

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 . 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.

Common IT Act depreciation rates

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.

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 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 accounting software 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 are both non-cash cost-allocation mechanisms, but they are usually applied to different asset types.

For accounting, tangible assets 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.

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.