Depreciation: Meaning, Methods & Formula
Definition
Depreciation is the reduction in the value of a fixed asset — machinery, vehicles, buildings — because of use, wear and passage of time, charged as an expense over the asset's useful life.
| Term | Depreciation |
|---|---|
| In Hindi | मूल्यह्रास |
| Area | Accounting |
| Search phrase | depreciation meaning |
| Try it | Journal entries |
मूल्यह्रास — हिंदी में अर्थ
मूल्यह्रास किसी स्थायी संपत्ति (मशीन, वाहन, भवन) के मूल्य में उपयोग, घिसावट और समय के कारण होने वाली कमी है, जिसे उसकी उपयोगी अवधि में खर्च के रूप में दिखाया जाता है।
Straight line method (SLM)
Annual depreciation = (Cost − Residual value) ÷ Useful life. A machine costing ₹10 lakh with ₹1 lakh residual value and 10-year life is depreciated ₹90,000 every year.
Written down value method (WDV)
A fixed percentage is charged on the reducing book value each year. At 15%, the same ₹10 lakh machine is depreciated ₹1,50,000 in year one, ₹1,27,500 in year two, and so on. Income-tax depreciation uses WDV on blocks of assets; companies follow the useful lives in Schedule II of the Companies Act for their books.
Example
Depreciation entry for ₹90,000: Depreciation A/c Dr ₹90,000; To Machinery A/c ₹90,000.
Related tools and guides
Frequently asked questions
What is depreciation in simple words?
The gradual loss in value of an asset as it is used, spread as an expense over its life.
What are the main methods of depreciation?
Straight line method (equal amount every year) and written down value method (fixed percentage on the reducing balance).
Is depreciation a cash expense?
No. It reduces profit but no cash is paid, which is why it is added back in cash flow statements.
Is land depreciated?
No. Land is not depreciated because it does not wear out; buildings on it are.
Related terms
- Accounts receivableAccounts receivable is the money customers owe a business for goods or services already supplied on credit. It is shown as trade receivables (debtors) under current assets.
- Accrual vs cash basis of accountingUnder the accrual (mercantile) basis, income and expenses are recorded when they are earned or incurred, whatever the payment date. Under the cash basis, they are recorded only when cash is actually received or paid.
- Balance sheetA balance sheet is a statement of what a business owns (assets) and what it owes (liabilities and owners' equity) on a particular date. Total assets always equal total equity plus liabilities.
- Cash conversion cycleThe cash conversion cycle (CCC) is the number of days between paying for raw material and collecting cash from the customer for the finished goods: days inventory outstanding plus days sales outstanding minus days payables outstanding.
- Contra entryA contra entry is a transaction between cash and bank accounts of the same business — such as cash deposited into the bank or cash withdrawn for office use — where both the debit and the credit side are cash or bank.
- Contribution marginContribution margin is selling price minus variable cost. It is the amount each sale contributes first towards fixed costs and then to profit; as a percentage of sales it is called the contribution margin ratio or P/V ratio.