The systematic allocation of the cost of a tangible asset over its useful life, representing the decline in value due to wear, use, or obsolescence.
Depreciation is a non-cash expense that spreads the cost of an asset over the years it generates revenue. Common methods include Straight-Line (equal amounts each year), Written Down Value/Declining Balance (higher in early years), and Units of Production (based on usage). Depreciation reduces taxable income and is governed by accounting standards (Ind AS 16, IAS 16) and tax laws (Income Tax Act schedules).
A company buys machinery for ₹10,00,000 with a 10-year useful life and ₹1,00,000 salvage value. Annual depreciation = (₹10,00,000 − ₹1,00,000) ÷ 10 = ₹90,000 per year.
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
Depreciation is a real accounting expense but not a cash expense — no money leaves the business when depreciation is recorded. It reflects the declining value of assets over time.
Depreciation applies to tangible assets (machinery, vehicles, buildings). Amortization applies to intangible assets (patents, trademarks, software licenses). The concept is the same — spreading cost over useful life.
A financial statement that shows a company's assets, liabilities, and equity at a specific point in time.
A financial statement that summarizes a company's revenues, costs, and expenses over a specific period to show net profit or loss.
The gradual write-off of the cost of an intangible asset (like patents, software, or goodwill) over its useful life, or the repayment of a loan in installments.
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