{"id":12378,"date":"2023-04-20T17:05:38","date_gmt":"2023-04-20T11:35:38","guid":{"rendered":"https:\/\/razorpay.com\/blog\/?p=12378"},"modified":"2025-03-04T19:25:21","modified_gmt":"2025-03-04T13:55:21","slug":"depreciation-in-accounting","status":"publish","type":"post","link":"https:\/\/razorpay.com\/blog\/business-banking\/depreciation-in-accounting\/","title":{"rendered":"Depreciation in Accounting: A Detailed Guide for Businesses"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">Depreciation in accounting refers to non-cash expenditures that every business body has to incur. These expenses result from employing tangible assets (like tools, machinery, equipment etc.) in business; the value of which tends to deplete because of continuous usage.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It is the explicit expense that businesses account for throughout an asset&#8217;s life prospects. To know the particularities of depreciation in accounting, refer to the sections below!<\/span><\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_80 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69d0da161ce6d\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69d0da161ce6d\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/depreciation-in-accounting\/#What_Is_Depreciation_in_Accounting\" >What Is Depreciation in Accounting?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/depreciation-in-accounting\/#Importance_of_Depreciation_in_Accounting\" >Importance of Depreciation in Accounting<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/depreciation-in-accounting\/#Know_About_the_Important_Terms_Relating_to_Depreciation\" >Know About the Important Terms Relating to Depreciation\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/depreciation-in-accounting\/#Types_of_Depreciation_Methods\" >Types of Depreciation Methods<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/depreciation-in-accounting\/#Sum-of-Years_Digit_Method\" >Sum-of-Years Digit Method<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/depreciation-in-accounting\/#Example_of_Depreciation\" >Example of Depreciation<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/depreciation-in-accounting\/#How_Does_Depreciation_Affect_Accounting_Ratios\" >How Does Depreciation Affect Accounting Ratios?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/depreciation-in-accounting\/#Get_RazorpayX_Current_Account_%E2%80%93_its_built_for_disruptors_like_you\" >Get RazorpayX Current Account &#8211; it\u2019s built for disruptors like you\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/depreciation-in-accounting\/#Frequently_Asked_Questions\" >Frequently Asked Questions<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"What_Is_Depreciation_in_Accounting\"><\/span><b>What Is Depreciation in Accounting?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Depreciation is taken into account as a significant business expenditure. Entities allocate it in order to levy a proportion of depreciable amount during the asset\u2019s expected useful life in every accounting period of a business. Depreciation in accounting helps business entities gain an understanding of the actual cost of conducting a business operation.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Depreciation costs also help entities identify the total amount of wear and tear caused due to the effect of decay, dust and erosion. Not to mention, it allows them to generate revenue from those fixed assets by making payments for them over a span of time.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Importance_of_Depreciation_in_Accounting\"><\/span><b>Importance of Depreciation in Accounting<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Depreciation in accounting enables business bodies to spread the asset value over many years. It is important to record as one cannot avoid it. It is not possible to maintain the original condition or form of an asset, while technologies become obsolete, few assets become inoperable because of their inefficiency.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The depreciated amount can be utilised to buy new machinery which ensures smooth business operations, leading to higher profitability. There are certain terms that define the working of depreciation in accounting.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Know_About_the_Important_Terms_Relating_to_Depreciation\"><\/span><b>Know About the Important Terms Relating to Depreciation\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ul>\n<li><b>Salvage Life:<\/b><span style=\"font-weight: 400;\"> This refers to the residual cost which business owners can recover after selling the fixed asset when its useful life gets exhausted.\u00a0<\/span><\/li>\n<li aria-level=\"1\"><b>Useful Life of Fixed Asset<\/b><span style=\"font-weight: 400;\">: This is the estimated time span when an asset remains highly efficient and productive. It is no more cost-effective to use this fixed asset beyond its useful life.\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li aria-level=\"1\"><b>Depreciation Rate<\/b><span style=\"font-weight: 400;\">: It refers to the percentage that is chargeable as depreciation on a business&#8217; fixed asset.\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li aria-level=\"1\"><b>Fixed Asset Cost:<\/b><span style=\"font-weight: 400;\"> It refers to the cost that a business body bears while purchasing a tangible asset.\u00a0<\/span><\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Types_of_Depreciation_Methods\"><\/span><b>Types of Depreciation Methods<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ul>\n<li aria-level=\"1\">\n<h3><strong>Straight-Line Depreciation<\/strong><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Straight-line depreciation method is the most convenient way to compute depreciation cost. The amount of expense remains the same throughout the asset&#8217;s useful life. In this depreciation mode, the same depreciation amount is chargeable.<\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td><b>Straight-line depreciation = (Asset cost &#8211; residual value)\/ Useful Life in Units of Production<\/b><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<ul>\n<li aria-level=\"1\">\n<h3><b>Double Declining Depreciation<\/b><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Double declining depreciation results when there is a high percentage of asset value that is depleted in the initial years of the useful life of a fixed asset. It is an accelerated mode of depreciation which highlights that the assets used by businesses remain more productive in the initial years. It also indicates that the asset loses its worth in the first years of its usage.\u00a0<\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td><b>Depreciation = (Net Book Value \u2013 Salvage Value) X (2\/ Useful Life) X Depreciation rate<\/b><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<ul>\n<li aria-level=\"1\">\n<h3><b>Units of Production Method<\/b><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">In this depreciation method, there is an estimation of the total units that a fixed asset will produce throughout its useful life. Units of the production method revolve around the work that the asset is capable of doing rather than focusing on the time for which it will be functional.\u00a0<\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td><b>Per unit depreciation = (Asset cost\u2013 Residual Value\/salvage value)\/ Total units produced over the useful life\u00a0<\/b><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<ul>\n<li aria-level=\"1\">\n<h2><span class=\"ez-toc-section\" id=\"Sum-of-Years_Digit_Method\"><\/span><b>Sum-of-Years Digit Method<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">It is another accelerated depreciation mode where the asset&#8217;s residual life is divided by the total sum of years and multiplied by the depreciating base. As the name suggests, this depreciation mode takes into consideration the total useful lifetime\/years of the asset.<\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td><b>Depreciation expense = (Remaining asset life \/ Sum of the years) X (Asset cost &#8211; Salvage value)<\/b><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<div class=\"group w-full text-gray-800 dark:text-gray-100 border-b border-black\/10 dark:border-gray-900\/50 dark:bg-gray-800\">\n<div class=\"text-base gap-4 md:gap-6 md:max-w-2xl lg:max-w-xl xl:max-w-3xl p-4 md:py-6 flex lg:px-0 m-auto\">\n<div class=\"relative flex w-[calc(100%-50px)] flex-col gap-1 md:gap-3 lg:w-[calc(100%-115px)]\">\n<div class=\"flex flex-grow flex-col gap-3\">\n<h2 class=\"min-h-[20px] flex flex-col items-start gap-4 whitespace-pre-wrap\"><span class=\"ez-toc-section\" id=\"Example_of_Depreciation\"><\/span>Example of Depreciation<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<\/div>\n<div class=\"flex justify-between lg:block\"><span style=\"font-size: 19px;\">An example of depreciation is when a company purchases a delivery truck for $50,000 with an expected useful life of 5 years and a salvage value of Rs 5,000. Using the straight-line depreciation method, the annual depreciation expense would be (Rs 50,000 &#8211; Rs 5,000) \/ 5 = Rs 9,000 per year.<\/span><\/div>\n<div><\/div>\n<\/div>\n<\/div>\n<\/div>\n<div class=\"group w-full text-gray-800 dark:text-gray-100 border-b border-black\/10 dark:border-gray-900\/50 bg-gray-50 dark:bg-[#444654]\">\n<div class=\"text-base gap-4 md:gap-6 md:max-w-2xl lg:max-w-xl xl:max-w-3xl p-4 md:py-6 flex lg:px-0 m-auto\">\n<div class=\"relative flex w-[calc(100%-50px)] flex-col gap-1 md:gap-3 lg:w-[calc(100%-115px)]\">\n<div class=\"flex flex-grow flex-col gap-3\">\n<div class=\"min-h-[20px] flex flex-col items-start gap-4 whitespace-pre-wrap\">\n<div class=\"markdown prose w-full break-words dark:prose-invert light\">\n<p>At the end of the first year, the accumulated depreciation would be Rs 9,000. At the end of the second year, it would be Rs18,000, and so on until the end of the fifth year when the accumulated depreciation would be Rs 45,000. At this point, the company would have fully depreciated the truck, and its net book value on the balance sheet would be the salvage value of Rs 5,000.<\/p>\n<div class=\"group w-full text-gray-800 dark:text-gray-100 border-b border-black\/10 dark:border-gray-900\/50 dark:bg-gray-800\">\n<div class=\"text-base gap-4 md:gap-6 md:max-w-2xl lg:max-w-xl xl:max-w-3xl p-4 md:py-6 flex lg:px-0 m-auto\">\n<div class=\"relative flex w-[calc(100%-50px)] flex-col gap-1 md:gap-3 lg:w-[calc(100%-115px)]\">\n<div class=\"flex flex-grow flex-col gap-3\">\n<h2 class=\"min-h-[20px] flex flex-col items-start gap-4 whitespace-pre-wrap\"><span class=\"ez-toc-section\" id=\"How_Does_Depreciation_Affect_Accounting_Ratios\"><\/span>How Does Depreciation Affect Accounting Ratios?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<\/div>\n<div class=\"flex justify-between lg:block\"><span style=\"font-size: 19px;\">Depreciation can have a significant impact on accounting ratios as it affects both the numerator and denominator of various financial ratios. Here are a few examples:<\/span><\/div>\n<div><\/div>\n<\/div>\n<\/div>\n<\/div>\n<div class=\"group w-full text-gray-800 dark:text-gray-100 border-b border-black\/10 dark:border-gray-900\/50 bg-gray-50 dark:bg-[#444654]\">\n<div class=\"text-base gap-4 md:gap-6 md:max-w-2xl lg:max-w-xl xl:max-w-3xl p-4 md:py-6 flex lg:px-0 m-auto\">\n<div class=\"relative flex w-[calc(100%-50px)] flex-col gap-1 md:gap-3 lg:w-[calc(100%-115px)]\">\n<div class=\"flex flex-grow flex-col gap-3\">\n<div class=\"min-h-[20px] flex flex-col items-start gap-4 whitespace-pre-wrap\">\n<div class=\"markdown prose w-full break-words dark:prose-invert light\">\n<ul>\n<li><strong>Return on assets (ROA):<\/strong> Depreciation reduces the value of assets over time, which reduces the denominator of the ROA ratio. As a result, the ROA ratio can increase or decrease depending on the level of depreciation expense.<\/li>\n<li><strong>Debt to equity ratio:<\/strong> Depreciation reduces net income and, in turn, retained earnings. This can impact the denominator of the debt-to-equity ratio, which is shareholders&#8217; equity. A decrease in equity can increase the debt-to-equity ratio, making the company look riskier to lenders.<\/li>\n<li><strong>Earnings per share (EPS):<\/strong> Depreciation is a non-cash expense that reduces net income. This can impact the numerator of the EPS ratio, which is net income. A decrease in net income can result in a lower EPS.<\/li>\n<li><strong>Price-to-earnings (P\/E) ratio:<\/strong> Depreciation reduces net income, which can impact the denominator of the P\/E ratio. As a result, a decrease in net income due to depreciation can increase the P\/E ratio, making the stock look more expensive.<\/li>\n<\/ul>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<h2><span class=\"ez-toc-section\" id=\"Get_RazorpayX_Current_Account_%E2%80%93_its_built_for_disruptors_like_you\"><\/span><b>Get RazorpayX Current Account &#8211; it\u2019s built for disruptors like you\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">We know managing a startup can be hard. That\u2019s why we created a current account that is tailor-made for startups like yours. With RazorpayX Current Account, you get:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Easy credit: Guaranteed collateral free Credit Cards<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Powerful automation: Taxes, Vendor Payments, Payroll and more.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Smart Dashboard: Manage inflows and outflows seamlessly<\/span><\/li>\n<li aria-level=\"1\">Forex Services and more<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Integrated access: Access via desktop, mobile or your smartwatch.<\/span><\/li>\n<\/ul>\n<div style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528FF0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/razorpay.com\/x\/current-accounts\/?r=blog_cta_depreciation_in_accounting\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">Sign up for RazorpayX Current Account<\/a><\/div>\n<h2><span class=\"ez-toc-section\" id=\"Frequently_Asked_Questions\"><\/span>Frequently Asked Questions<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<div id=\"rank-math-rich-snippet-wrapper\"><div id=\"rank-math-faq\" class=\"rank-math-block\">\n<div class=\"rank-math-list \">\n<div id=\"faq-1\" class=\"rank-math-list-item\">\n<h3 class=\"rank-math-question \">What is the difference between depreciation and amortisation?<\/h3>\n<div class=\"rank-math-answer \">\n\n<p>While depreciation is the gradual depletion or reduction of a tangible asset\u2019s recorded value, amortisation shows the consumption of intangible assets over their useful life. These two accounting processes also differ in the usage of salvage value in the calculation. Salvage value comes under the calculation of depreciation while in amortisation it does not.<\/p>\n\n<\/div>\n<\/div>\n<div id=\"faq-2\" class=\"rank-math-list-item\">\n<h3 class=\"rank-math-question \">Is there any difference between depreciation expense and accumulated depreciation?<\/h3>\n<div class=\"rank-math-answer \">\n\n<p>While depreciation in accounting comes on the income statement, accumulated depreciation appears on the balance sheet. Depreciation expense is the asset\u2019s cost, allocated and reported after every financial year. It can also reduce tax liability.  On the other hand, accumulated depreciation records the total depreciation incurred for a fixed asset. The relative age of the asset can be determined via accumulated depreciation.<\/p>\n\n<\/div>\n<\/div>\n<div id=\"faq-3\" class=\"rank-math-list-item\">\n<h3 class=\"rank-math-question \">What are some of the assets a business uses that lose their value with time?<\/h3>\n<div class=\"rank-math-answer \">\n\n<p>Buildings, automobiles, furniture, fixtures, machinery and equipment, computer systems etc., are assets that keep depreciating with continuous usage. Thus, these assets are often regarded as depreciable assets, capital assets etc.<\/p>\n\n<\/div>\n<\/div>\n<div id=\"faq-4\" class=\"rank-math-list-item\">\n<h3 class=\"rank-math-question \">What is book value?<\/h3>\n<div class=\"rank-math-answer \">\n\n<p>The book value refers to a business's net asset value which one can evaluate as total assets less total liabilities. It is an important determinant that helps business bodies to track growth and acts as a standard of real-time worth for investors.<\/p>\n\n<\/div>\n<\/div>\n<\/div>\n<\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Depreciation in accounting refers to non-cash expenditures that every business body has to incur. These expenses result from employing tangible assets (like tools, machinery, equipment etc.) in business; the value of which tends to deplete because of continuous usage.\u00a0 It is the explicit expense that businesses account for throughout an asset&#8217;s life prospects. To know<\/p>\n","protected":false},"author":102,"featured_media":12384,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[27],"tags":[],"class_list":{"0":"post-12378","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-business-banking"},"_links":{"self":[{"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/posts\/12378","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/users\/102"}],"replies":[{"embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/comments?post=12378"}],"version-history":[{"count":2,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/posts\/12378\/revisions"}],"predecessor-version":[{"id":21131,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/posts\/12378\/revisions\/21131"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/media\/12384"}],"wp:attachment":[{"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/media?parent=12378"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/categories?post=12378"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/tags?post=12378"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}