A depreciation journal entry debits an expense and credits accumulated depreciation. The asset itself is never touched after the day you buy it.
That one habit is what most entries get wrong. Credit the asset directly and your balance sheet stops showing what the machine cost you.
The six examples below cover both methods. They start at the first year and end on the day you sell at a loss.
Key Takeaways
- Debit Depreciation, credit Accumulated Depreciation, and leave the asset at cost
- Straight line charges the same figure every year; written down value front-loads it
- Schedule II caps residual value at 5% of cost
- Books and tax will not match, and they are not meant to
- On a sale, remove both the cost and the accumulated depreciation
What Does a Depreciation Journal Entry Actually Record?
The entry records the part of an asset you used up this year. This section covers why it never touches the asset account. The ICAI guidance on Schedule II puts it simply. Depreciation is “systematic allocation of the depreciable amount of an asset over its useful life”.
The Two Sides of the Entry
The entry has two sides. Depreciation is an expense, so it is debited and lands in your profit and loss account. Accumulated depreciation is a contra-asset, so it is credited and sits against the asset on the balance sheet.
Why the Asset Account Never Moves
Keeping the two apart is the point. The asset stays at what you paid, and the accumulated figure shows how much of that has been written off. Subtract one from the other and you get the carrying amount.
That is the figure your balance sheet carries. It is also the number a disposal is measured against. The two examples at the end of this post depend on getting this habit right.
That is the shape of every entry below. What changes between them is how the charge is worked out.
The Two Methods Behind These Depreciation Entries
Both straight line and written down value are allowed in your books. The choice changes the timing rather than the total. Schedule II prescribes “indicative useful lives of various assets” rather than fixed SLM or WDV rates. You pick the life first, and the rate follows from it.
Straight line divides the depreciable amount evenly across the useful life. Written down value applies a fixed percentage to the opening book value, so the charge shrinks every year.
Residual value is capped. The same guidance quotes Schedule II: the residual value “shall not be more than five per cent. of the original cost of the asset”. Our depreciation methods guide works the maths for all five methods, so the entries below only show the posting.
Both methods reach the same total over the life of the asset. The six examples below start with the simpler one.
1. First Year on the Straight Line Method
A supermarket in Vastrapur buys a refrigerated display unit for ₹2,40,000 on 1 April 2026 (an example). Schedule II gives general plant and machinery a 15-year life. Residual value is capped at 5%, so ₹12,000 stays on the books at the end.
Our Companies Act rate chart lists the life and both rates for every common asset class.
The depreciable amount is ₹2,28,000. Spread across 15 years, that is ₹15,200 a year.
| Account | Debit | Credit |
|---|---|---|
| Depreciation | ₹15,200 | |
| Accumulated depreciation, plant and machinery | ₹15,200 |
Pass it on 31 March, with a narration naming the asset. “Being depreciation on refrigerated display unit for the year” is enough for an auditor to follow a year later.
The same entry repeats for fourteen more years without changing. That is the whole appeal of the method. Nobody recalculates anything, and the charge against profit never moves.
2. The Same Asset on the Written Down Value Method
Change nothing but the method and the first-year figure nearly triples. The written down value rate for a 15-year life with 5% residual works out at 18.10%.
Applied to the full cost of ₹2,40,000, that is ₹43,440.
| Account | Debit | Credit |
|---|---|---|
| Depreciation | ₹43,440 | |
| Accumulated depreciation, plant and machinery | ₹43,440 |
Year two applies the same percentage to the reduced balance of ₹1,96,560, giving ₹35,577. The entry is identical in shape. Only the number moves, and it moves down every year.
Neither method is more correct. A business that wants an even charge against profit picks straight line. One that wants the cost recognised while the asset is new picks written down value.
3. An Asset Bought Mid-Year
Nothing says depreciation starts in April. An electronics retailer in Madhapur buys four billing laptops for ₹1,80,000 on 1 November 2026 (an example). The charge runs from the day they are put to use.
Schedule II gives end-user devices a three-year life. Full-year depreciation on the straight line method is ₹57,000. The asset was in use for five months of the year, so the charge is five twelfths of that.
| Account | Debit | Credit |
|---|---|---|
| Depreciation | ₹23,750 | |
| Accumulated depreciation, computers | ₹23,750 |
Note what the entry does not do. It does not wait for the year to end and then apportion. Nor does it start from the invoice date if the laptops sat in a box for three weeks. The clock starts when the asset is put to use.
Your tax computation does something different with the same purchase, and the section below on books and tax covers why.
4. The Year an Asset Is Fully Depreciated
Depreciation stops at the residual value. It does not run to zero.
Take the display unit from the first example. After 15 years the accumulated depreciation stands at ₹2,28,000. The carrying amount is ₹12,000, which is the 5% residual Schedule II allows.
| Account | Balance |
|---|---|
| Display unit, at cost | ₹2,40,000 |
| Less accumulated depreciation | ₹2,28,000 |
| Carrying amount | ₹12,000 |
There is no entry to post. The asset stays on the register at ₹12,000 until it is sold or scrapped. Plenty of businesses keep using it for years after that. A fully depreciated asset still earning money is not a problem to correct. It means the useful life was set conservatively.
You cannot restart the charge, but you can revise the estimate. Schedule II lets a company adopt a useful life different from the one it prescribes, provided the financial statements disclose the difference. Do that prospectively, before the asset runs out, rather than as a correction afterwards.
5. An Asset Sold at a Profit
Selling an asset takes four lines, not one. You bring in the proceeds, remove the cost, remove the accumulated depreciation, and recognise the difference.
A garment wholesaler in Sarkhej sells a delivery van that cost ₹8,40,000 and carries ₹5,60,000 of accumulated depreciation (an example). The carrying amount is ₹2,80,000. It sells for ₹3,25,000.
| Account | Debit | Credit |
|---|---|---|
| Bank | ₹3,25,000 | |
| Accumulated depreciation, vehicles | ₹5,60,000 | |
| Vehicles, at cost | ₹8,40,000 | |
| Profit on sale of asset | ₹45,000 |
The profit is not a trading profit. It belongs in other income, because it came from disposing of an asset rather than from selling stock.
Charge depreciation up to the date of sale before you pass this entry. Skip that step and the carrying amount is too high, which makes the profit look smaller than it was.
One thing that catches people out: GST applies to the sale of a used business asset. Our GST invoice template covers what that invoice has to carry.
6. An Asset Sold at a Loss
A loss runs through the same four lines, with the balancing figure on the other side. Take shop fittings in a Pimpri textile showroom (an example). They cost ₹3,60,000, and ₹2,16,000 has been written off so far, leaving a carrying amount of ₹1,44,000. The best offer on the floor is ₹96,000.
| Account | Debit | Credit |
|---|---|---|
| Bank | ₹96,000 | |
| Accumulated depreciation, furniture | ₹2,16,000 | |
| Loss on sale of asset | ₹48,000 | |
| Furniture and fittings, at cost | ₹3,60,000 |
A loss here is not a mistake. It means the asset fell in value faster than the useful life assumed. That happens to anything with a screen in it.
The loss is deductible in your books in the year of sale. Whether it reduces your tax in the same year is a separate question. The answer is usually no, for the reason the next section explains.
The trial balance will still balance if you drop one of these lines. That is exactly why disposals go wrong quietly. Check them against the asset register, not the ledger. Our 25 worked journal entries cover the everyday postings around them.
Why Do Your Books and Your Tax Return Not Match?
Books and tax run on two different rulebooks, and this section covers where they part company. Your books follow Schedule II, which sets a useful life and lets you pick the method.
Two Rulebooks, Two Sets of Rates
Your tax computation follows the Income-tax Act, 2025. This is the part that changed this year. The Income Tax Department confirms the position plainly: “the 1961 Act stands repealed on the 01.04.2026”.
Very little changed for depreciation itself. The new Act keeps the block of assets, keeps written down value as the only method, and keeps the rates. Computers get 40%, plant and machinery 15%, furniture 10%.
What did change is which Act you name. Returns for the year to 31 March 2026 are still filed under the old Act, while the tax year running now falls under the new one. Both are live at once, which is worth knowing before you label a working.
Go back to the laptops in example 3. Your books charged ₹23,750 for five months. For tax, the asset was put to use for fewer than 180 days. Depreciation in the year of acquisition is then halved. That is 20% of ₹1,80,000, or ₹36,000.
| Laptops bought 1 November | Books | Tax |
|---|---|---|
| Method | Straight line | Written down value |
| Basis | Five months of a 3-year life | 40% rate, halved under 180 days |
| Charge | ₹23,750 | ₹36,000 |
What Happens on a Disposal
Disposals diverge too. In your books you record a profit or loss on each asset. Under the block system, the sale proceeds are deducted from the opening written down value of the whole block. Usually no gain or loss arises at all.
Where Do Depreciation Entries Go Wrong?
Three mistakes account for most of the corrections, and none of them is a maths error.
None of this is survey data. It is what accountants and retail owners tell us when the talk turns to a slow year-end.
The asset gets credited instead of accumulated depreciation. The profit figure is right and the balance sheet is wrong. You lose the original cost, so nobody can tell a three-year-old machine from a new one.
The disposal is half posted. Cash comes in and the profit is taken, but the cost and the accumulated depreciation stay on the register. The asset list grows every year with things that left the building.
The tax figure is posted in the books. Someone takes the number from the tax computation and journalises it. While talking to retailers using Petpooja, this is the one we hear about most. It usually surfaces in the week the audit starts.
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Conclusion
Depreciation entries are simple once the habit is right. Debit the expense, credit accumulated depreciation, and leave the asset at cost.
The method only changes the timing. Straight line gives you an even charge and written down value front-loads it. Both land at the same place in the end.
Watch the two events that are not routine. A mid-year purchase needs a part-year charge. A disposal needs the cost and the accumulated depreciation off the books together.
Keep your tax figure separate from your book figure. They were never meant to agree. Posting one in place of the other is the correction that costs the most time to unpick.
Every entry here starts from a purchase record and ends in your books. Keeping those records in one place, and reconciled, is what your GST billing system is for.
Frequently Asked Questions
Accumulated depreciation, in almost every case. It keeps the original cost visible on the balance sheet. It also shows how much of the asset has been used up. Crediting the asset directly gives the same profit figure but hides what you paid.
Either works, as long as you are consistent. Yearly is common in smaller businesses. Monthly gives you a truer profit figure each month. That matters if you review management accounts rather than waiting for the year end.
Nothing is posted. The asset sits at its residual value until it is sold or scrapped. You do not restart depreciation. Nor do you write off the residual just because the useful life has run out.
Yes. Charge depreciation up to the date of sale first, then pass the disposal entry. Skipping it overstates the carrying amount and turns a small profit into a bigger one on paper.
Different rules. The Income-tax Act, 2025 uses its own rates on a block of assets, and written down value front-loads the charge. Book depreciation follows the useful life you set under Schedule II. A gap between the two is normal and is reconciled, not corrected.
Generally yes, on the sale of a used business asset. Where input tax credit was claimed, the amount payable is worked out against the remaining useful life. Check the figure with your accountant before you invoice.
