Five depreciation methods get taught. Three of them are usable in Indian company accounts, and two you will meet in an exam but never in a filed balance sheet.
The method does not change how much an asset costs you. It changes when that cost hits your profit. On the same machine, year one runs from ₹1,19,700 to ₹3,26,214 depending on which method you pick.
In the sets of accounts we see, the method is rarely chosen. It is inherited from whoever set up the fixed asset register, and never revisited.
Key Takeaways
- Ind AS 16 names three methods: straight line, diminishing balance, units of production
- Sum of years digits and double declining are taught, not filed in India
- For the three usable methods, timing changes but the total does not
- Units of production is the only one tied to output, not time
- Apply your chosen method consistently and disclose it
What Is Depreciation?
Depreciation is how you spread the cost of an asset across the years you use it, instead of charging the whole cost in the year you bought it.
A machine bought this March does not stop being useful on 31 March. It earns for you across years, so your accounts charge a slice of its cost against each of those years.
Three figures decide the size of that slice:
- Cost: what you paid, including freight and installation
- Useful life: how long the asset is expected to serve
- Residual value: what it should still be worth at the end
Cost minus residual value gives the depreciable amount, and that is the figure every depreciation method spreads. The methods differ only in how they spread it.
None of this moves money. Depreciation is a book entry that lowers your reported profit and lowers the asset’s value on the balance sheet at the same time.
Which Methods You Can Actually Use in India
Start here, because most method comparisons online are written for American accounts.
Two rulebooks split the job. Schedule II of the Companies Act, 2013 fixes the useful life of an asset and caps residual value, but it never names a method. The accounting standards decide how the cost is spread across that life.
Paragraph 62 of Ind AS 16 says a variety of methods can allocate the depreciable amount over an asset’s useful life, and that these “include the straight-line method, the diminishing balance method and the units of production method”. Three named methods, and an entity picks the one matching how the asset’s benefits are consumed.
That applies whichever standard you are on. Ind AS 16 governs listed and large unlisted companies, and smaller companies follow AS 10, which names the same three methods and applies the same test.
Sum of years digits and double declining balance are real methods with real formulas, taught in ICAI study material and used under US GAAP. Neither is named in Ind AS 16, so treat them as background rather than options.
The 5 Depreciation Methods at a Glance
Every figure below comes from one asset, worked in the next section.
| Method | How the Charge Behaves | Year 1 on the Same Asset | Used in Indian Accounts |
|---|---|---|---|
| Straight line | Same every year | ₹1,19,700 | Yes |
| Written down value | Falls each year | ₹3,26,214 | Yes |
| Units of production | Tracks output | ₹1,49,625 | Yes |
| Sum of years digits | Falls each year | ₹2,17,636 | Taught, not filed |
| Double declining balance | Falls fastest early | ₹2,52,000 | Taught, not filed |
Understand 5 Depreciation Methods With Examples
One asset throughout. A Rajkot engineering unit buys a CNC cutting machine for ₹12,60,000 (an example), with a ten-year useful life and residual value at 5%, or ₹63,000. That leaves ₹11,97,000 to depreciate.
1. Straight Line Method
The simplest, and the default in most Indian books.
You divide the depreciable amount by the useful life, and charge the same figure every year.
₹11,97,000 ÷ 10 = ₹1,19,700 a year, for ten years running.
It suits assets that give up value steadily rather than in a rush. A building, office furniture, or a fit-out all wear down on a fairly flat curve. The charge is also the easiest to budget against, because next year’s figure is this year’s figure.
2. Written Down Value Method
Also called diminishing balance. This is the other method Indian companies actually use.
A fixed percentage applies to the opening book value, so the base shrinks and the charge falls each year. The rate that leaves exactly 5% residual after ten years is 25.89%.
Year one: ₹12,60,000 × 25.89% = ₹3,26,214. Year two applies the same rate to ₹9,33,786, and so on down.
That front-loading matches assets which lose most of their value early. A vehicle or a computer is worth far less after twelve months than a straight line would suggest.
3. Units of Production Method
The only one of the five tied to what the asset does rather than how long you have owned it.
You estimate total output over the asset’s life, then charge per unit produced. The CNC machine is expected to run 60,000 hours in total. In its first year it runs 7,500 hours.
₹11,97,000 × 7,500 ÷ 60,000 = ₹1,49,625.
A quiet year charges less, a heavy year charges more. That suits plant whose wear genuinely tracks usage, and it is why mining and heavy manufacturing reach for it. The catch is the estimate: get total output wrong and every year’s charge is wrong with it.
4. Sum of Years Digits Method
Here the arithmetic gets more elaborate for a similar effect to written down value.
Add up the digits of the useful life. For ten years that is 1 through 10, which totals 55. Year one takes 10/55 of the depreciable amount, year two takes 9/55, and so on to 1/55 in year ten.
Year one: ₹11,97,000 × 10 ÷ 55 = ₹2,17,636.
It front-loads like written down value but on a straight arithmetic slope rather than a curve, and unlike written down value it reaches the residual value exactly. You will meet it in exams rather than in an Indian filed account.
5. Double Declining Balance Method
The most aggressive of the five in year one, and the one most often confused with written down value.
You take twice the straight line rate and apply it to the opening book value, ignoring residual value until the end. Straight line over ten years is 10%, so the rate here is 20%.
Year one: ₹12,60,000 × 20% = ₹2,52,000.
Note what it does not do: it never touches the ₹11,97,000 depreciable figure. It works off full cost, which is why practitioners switch to straight line for the final years to avoid depreciating below residual value. That switching rule is the reason it sits outside Indian statutory practice.
How to Choose the Best Depreciation Method?
Now that you have seen all five worked, here is how to pick one.
For an Indian company the shortlist is three, and the test is not which produces the nicest profit. Depreciation is a non-cash operating cost whichever method you use, so the choice moves reported profit without moving any money.
Ind AS 16 asks you to pick the method reflecting the pattern in which the asset’s benefits are consumed. So the question is how the asset actually wears, not what suits this year’s numbers.
- Steady wear over time, such as a building or shop fit-out, points to straight line
- Heavy early value loss, such as vehicles, laptops or kitchen equipment, points to written down value
- Wear driven by output, such as a press or a cutting machine, points to units of production
The other two are worth knowing, but not for a filed Indian account:
- Sum of years digits front-loads the charge like written down value, on a straight slope rather than a curve. It reaches residual value exactly, which makes it useful for an internal model or an exam paper
- Double declining balance front-loads hardest of the five and needs a switch to straight line near the end. It is standard in US GAAP, so you will meet it in a group reporting pack rather than in your own books
Whichever you land on, apply it consistently and disclose it. Depreciation then shows as its own line in the profit and loss account, with the accumulated figure sitting against the asset on the balance sheet.
A change of method is not a free decision either. It is treated as a change in accounting estimate, applied going forward and disclosed, rather than something you flip year to year.
What This Means for Your Records
None of the five works without a clean asset record behind it.
Every method needs the same fields on the register:
- Original cost, including freight and installation
- Date of addition, which drives the first year’s pro rata charge
- Useful life and the method chosen
- Residual value
- Cumulative output, for units of production only
That last field is the one businesses fail to keep. A Coimbatore textile unit running units of production without an hour meter (an example) is estimating twice over, once on total life output and again on the year’s usage.
Keeping the purchase trail intact is what makes the register defensible. Petpooja Invoice holds the supplier invoice, date and value against each purchase, so the figures behind your depreciation come from documents rather than from memory at year end.
The annual charge then posts through the general ledger like any other entry, and our annual financial summary template gives you somewhere to pull the year’s totals together.
Conclusion
Five depreciation methods get taught, and three of them work in Indian company accounts: straight line, written down value and units of production.
The method you pick does not change what the asset costs you. It only changes which years carry that cost. Straight line spreads it evenly, written down value charges more in the early years, and units of production follows how much the asset is actually used.
So choose the one that matches how your asset wears, apply it the same way every year, and record it against the asset. Our journal entries guide shows how the yearly charge is posted, and a trial balance confirms both sides agree.
If your asset records are the weak point, fix those first. Petpooja Invoice keeps every purchase invoice, date and value on file.
Frequently Asked Questions
Straight line for most, because it is simple and matches how a fit-out or furniture wears. Written down value suits vehicles and computers that lose value early. Neither is better in the abstract, and both are permitted, so match the method to the asset rather than to the profit you want.
Not by itself. Straight line, written down value and sum of years digits all write off the same depreciable amount across the asset’s life, and only the timing moves. Double declining balance is the exception, because it works off full cost and needs a switch to straight line near the end to avoid falling below residual value. That timing shows up in the EBITDA calculation, where depreciation is added back.
Yes, and most companies do. The Income-tax Act works on a block of assets using written down value, while your books follow the method you have chosen under the accounting standards. Keeping both columns in the fixed asset register is normal practice.
You can, but it is treated as a change in accounting estimate. It applies from the date of change onward, needs disclosure, and should be driven by a genuine change in how the asset is used, not by the result you want.
Every year’s charge is wrong with it. Revise the total output estimate when reality diverges, and apply the revision going forward. That is one reason the method suits businesses that already meter output, and suits nobody who does not.
