Depreciation

Depreciation is an accounting concept used to allocate the cost of a tangible asset over its useful life. Instead of recording the full cost in one year, the expense is spread across multiple years.

It applies to assets like machinery, vehicles, buildings, and equipment. Depreciation helps businesses show a more accurate profit and financial position.

Common Methods of Depreciation

• Straight-Line Method: Equal depreciation every year
• Reducing Balance Method: Higher depreciation in early years
• Units of Production Method: Based on usage

Key Points

• Non-cash expense (no actual cash outflow)
• Reduces taxable income
• Reflects asset’s declining value

Why Depreciation Matters

• Helps in accurate financial reporting
• Matches cost with revenue generation
• Useful for tax calculations and planning

"A machine costing ₹1,00,000 with a useful life of 10 years may be depreciated at ₹10,000 per year (straight-line method)."