Depreciation accounting explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Depreciation spreads the cost of an asset, less any residual value, over the years it is expected to serve the business. The method used, the entries passed and the treatment of a change of method or a sale are set by AS 10. This guide works one machine through all of them. Our books of accounts compliance team applies these entries when it closes a client's year.
Depreciation is the systematic allocation of the depreciable amount (cost less residual value) over the useful life (AS 10, paragraphs 52 and 55). The method must reflect the pattern in which benefits are consumed (paragraph 62): straight line gives a constant charge, written down value a falling one. A change in method or useful life is a change in an accounting estimate, applied from the current year onwards without restating earlier years (paragraphs 53 and 63). On sale, profit or loss is sale proceeds less carrying amount and goes to the profit and loss account (paragraphs 75 and 79).
What AS 10 requires
| Paragraph | Requirement | In the books |
|---|---|---|
| 50 | The charge for each period goes to profit and loss, unless included in the cost of another asset | Debit depreciation, credit the asset or a provision account |
| 52, 55 | Allocate depreciable amount (after residual value) over useful life, systematically | Annual charge on a fixed basis |
| 53 | Review residual value and useful life at least each year-end; change is a change in estimate | Prospective adjustment |
| 57 | Depreciation begins when the asset is available for use | Charge from that date, not the date of order |
| 62 and 64 | Method must reflect the pattern of consumption; straight line, diminishing balance and units of production are examples | Select, then apply consistently |
| 63 | Review method at least each year-end; change if pattern changes; treat as change in estimate | No restatement |
| 74 to 79 | Derecognise on disposal; gain or loss is net proceeds less carrying amount | Disposal account |
Paragraph 62 asks that the method "should reflect the pattern in which the future economic benefits of the asset are expected to be consumed". Paragraph 60 notes that land is not normally depreciated, but buildings are. Our guide to AS 10 on property, plant and equipment covers the whole standard.
For companies, Schedule II to the Companies Act, 2013 is where the useful lives for computing depreciation come from. It says the useful life shall not ordinarily differ from the one specified in Part C, and that the residual value shall not be more than five per cent of original cost; a different life or residual value must be disclosed with justification. Look up the life for your class of asset there; none is quoted here. See also our note on Schedule II depreciation rates. Income-tax depreciation is a separate calculation: see our income-tax guides.
The two common methods
Straight line method (SLM): annual charge = (cost - residual value) / useful life. The charge is the same each year.
Written down value method (WDV, or diminishing balance): annual charge = a fixed rate x the carrying amount at the start of the year. The charge falls each year, and the asset never reaches nil.
Entries
| Event | Entry |
|---|---|
| Buying the asset | Machinery A/c Dr; To Bank/Creditor |
| Each year's charge | Depreciation A/c Dr; To Provision for Depreciation A/c (or directly to the asset, in the direct method) |
| Year end | Depreciation A/c closed to profit and loss |
| Sale | Transfer cost and the provision to a disposal account; credit it with proceeds; the balance is profit or loss |
Under the provision method the asset account stays at cost and the provision account builds up; the balance sheet shows both or the net figure. See capital and revenue expenditure for what goes into cost.
Worked example: a machine from purchase to sale
The entity and all figures in this example are invented for illustration.
Kaveri Tools Private Limited buys a milling machine on 1 April 2023 for 6,00,000. It expects a useful life of 6 years and a residual value of 30,000, which is five per cent of cost. The financial year ends on 31 March. The WDV rate of 20 per cent is an assumed rate, for arithmetic only.
Step 1 – the two methods compared over three years, each used throughout.
| Year | SLM charge | SLM carrying amount | WDV charge (20 per cent of opening) | WDV carrying amount |
|---|---|---|---|---|
| 2023-24 | 95,000 | 5,05,000 | 1,20,000 | 4,80,000 |
| 2024-25 | 95,000 | 4,10,000 | 96,000 | 3,84,000 |
| 2025-26 | 95,000 | 3,15,000 | 76,800 | 3,07,200 |
| Total | 2,85,000 | 2,92,800 |
Working: SLM charge = (6,00,000 - 30,000) / 6 = 95,000. WDV: 20 per cent of 6,00,000 = 1,20,000; of 4,80,000 = 96,000; of 3,84,000 = 76,800.
Step 2 – what the company actually does. It uses WDV for 2023-24 and 2024-25. At the review at 31 March 2025 it finds the machine is used evenly across the year and decides that straight line now reflects the pattern better (paragraph 63). This is a change in estimate: no restatement of the two earlier years.
At 1 April 2025, carrying amount is 3,84,000; remaining life is 4 years; residual value is 30,000.
New annual charge = (3,84,000 - 30,000) / 4 = 3,54,000 / 4 = 88,500.
Step 3 – the yearly charge actually booked.
| Year | Method | Charge |
|---|---|---|
| 2023-24 | WDV | 1,20,000 |
| 2024-25 | WDV | 96,000 |
| 2025-26 | SLM on revised basis | 88,500 |
| 2026-27 (1 April to 30 September, six months) | SLM | 44,250 |
| Total to date of sale | 3,48,750 |
Step 4 – the entries each year. Debit Depreciation account, credit Provision for Depreciation account, with the amounts above.
Step 5 – sale on 30 September 2026. The machine is sold for 2,70,000. Carrying amount at sale = 6,00,000 - 3,48,750 = 2,51,250. Profit on sale = 2,70,000 - 2,51,250 = 18,750, shown in profit and loss and not as revenue (paragraph 75).
Provision for depreciation account
| Date | Particulars | Debit | Date | Particulars | Credit |
|---|---|---|---|---|---|
| 30 Sep 2026 | To Machinery disposal | 3,48,750 | 31 Mar 2024 | By Depreciation | 1,20,000 |
| 31 Mar 2025 | By Depreciation | 96,000 | |||
| 31 Mar 2026 | By Depreciation | 88,500 | |||
| 30 Sep 2026 | By Depreciation | 44,250 | |||
| Total | 3,48,750 | Total | 3,48,750 |
Machinery disposal account
| Particulars | Debit | Particulars | Credit |
|---|---|---|---|
| To Machinery (cost) | 6,00,000 | By Provision for depreciation | 3,48,750 |
| To Profit and loss (profit on sale) | 18,750 | By Bank (sale proceeds) | 2,70,000 |
| Total | 6,18,750 | Total | 6,18,750 |
| Entry on sale | Debit | Credit |
|---|---|---|
| Machinery Disposal A/c Dr | 6,00,000 | |
| To Machinery A/c | 6,00,000 | |
| Provision for Depreciation A/c Dr | 3,48,750 | |
| To Machinery Disposal A/c | 3,48,750 | |
| Bank A/c Dr | 2,70,000 | |
| To Machinery Disposal A/c | 2,70,000 | |
| Machinery Disposal A/c Dr | 18,750 | |
| To Profit and Loss A/c (profit on sale) | 18,750 | |
| Total | 12,37,500 | 12,37,500 |
Check: 1,20,000 + 96,000 + 88,500 + 44,250 = 3,48,750; 6,00,000 - 3,48,750 = 2,51,250; 2,70,000 - 2,51,250 = 18,750; disposal account 6,00,000 + 18,750 = 6,18,750 = 3,48,750 + 2,70,000.
If the machine had instead been sold for 2,40,000, the difference with the carrying amount of 2,51,250 would have been a loss of 11,250.
Disclosure. The change of method has to be disclosed as a change in estimate if its effect is material (see our guide to measurement bases and estimates).
Common mistakes
- Restating earlier years after a change of method: the change is prospective.
- Depreciating land: it is not normally depreciated.
- Starting depreciation at the date of purchase: it starts when the asset is available for use.
- Forgetting the sale-year charge: depreciation runs up to the date of sale.
- Treating the gain on sale as sales revenue: it is a gain, not revenue.
Need help with depreciation?
If your fixed asset register, useful lives and methods have not been reviewed, we can check them against AS 10 and, for companies, Schedule II, and pass the entries. Our books of accounts compliance team prepares the schedule at each year-end.
Key takeaways
- Depreciation allocates cost less residual value over useful life.
- SLM gives a constant charge; WDV a falling one.
- Review method and life at least each year-end; a change is a change in estimate.
- On sale, profit or loss is proceeds less carrying amount.
- For companies, Schedule II is the place to look up lives and the residual value limit.
Read next
- Capital expenditure v revenue expenditure
- Measurement bases in accounting
- Final accounts of a sole proprietor
- AS 10 Property, Plant and Equipment
Disclaimer: Based on the Accounting Standards issued by the Institute of Chartered Accountants of India as on 1 April 2025, the Companies (Accounting Standards) Rules, 2021 as amended up to G.S.R. 169(E) of 10 March 2026, the Companies Act, 2013 and the ICAI guidance named in the article, as consulted on 4 October 2026. The worked example uses invented figures. Later amendments should be checked on icai.org and mca.gov.in. This article is general information, not legal advice; check the official text before acting.