Glossary
What is depreciation?
A machine bought this year earns money for ten. Depreciation charges its cost across those years instead of all at once.
Updated
In short
Depreciation spreads the cost of a long-lived asset over the years it is used. SimpleERP posts straight-line or written-down value depreciation each month from every asset's schedule, in one click for all assets.
Depreciation spreads the cost of a long-lived asset, such as a machine, vehicle or computer, over the years it is used, instead of charging it all as an expense when it is bought. The two common methods are straight line, an equal amount each period, and written-down value, a fixed percentage of the remaining book value. It lowers profit without any cash leaving the business.
Depreciation: a worked example
Lakshmi Steel Furnitures buys a laser cutting machine (AST-0003) for ₹6,40,000 on 1 April 2026. Straight line over 10 years to a residual value of ₹40,000, or written-down value at 15% a year:
| Year | Straight line | Book value | Written-down value | Book value |
|---|---|---|---|---|
| 2026-27 | ₹60,000 | ₹5,80,000 | ₹96,000 | ₹5,44,000 |
| 2027-28 | ₹60,000 | ₹5,20,000 | ₹81,600 | ₹4,62,400 |
| 2028-29 | ₹60,000 | ₹4,60,000 | ₹69,360 | ₹3,93,040 |
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | ₹5,000 | |
| Accumulated depreciation: machinery | ₹5,000 |
Is book depreciation the same as income tax depreciation?
Not always. Income tax depreciation follows block rates under the Income-tax Act, while books follow the method and life you choose. Your accountant reconciles the two in the tax computation, so the books can use the method that best reflects how the asset is used.
FAQ
Questions, answered
Which depreciation method should a small business use?
Straight line is simplest and suits assets used evenly, such as furniture or a building fit-out. Written-down value charges more in early years and suits machines and vehicles that lose value fast. Pick one per asset category and keep to it so years compare fairly.
Is depreciation a cash expense?
No. The cash left when the asset was bought. Depreciation is a book entry that moves part of the cost into the P&L each period, so profit falls but the bank balance does not. That is why cash flow and profit differ.
What happens to depreciation when I sell an asset?
Depreciation stops at the disposal date. The asset's cost and accumulated depreciation are removed, and the difference between its book value and the sale price is recorded as a gain or loss on disposal in the P&L.
Should I post depreciation monthly or yearly?
Monthly gives a truer monthly P&L, because a year's charge is not dumped into March. If your software posts it from each asset's schedule in one step, monthly costs no more effort than yearly and keeps book values current.
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