How to Calculate Depreciation: Methods and Examples What is Depreciation? Simply, depreciation is the decrease in value of an asset over time.
Whenever you buy something for your business like a machine, computer or furniture, it doesn’t stay new forever. With use, it wears down, loses efficiency or become outdated. The amount by which its value drops each year is what we call depreciation.
Depreciation helps you record this gradual value loss in your accounts. It’s not just an accounting rule, it helps you know the true worth of your assets and manage taxes better.
For example: you buy a laptop for ₹60,000. After 3 years, it’s not worth the same. Maybe only ₹25,000. The difference in value (₹35,000) is the depreciation spread over 3 years.
Why Depreciation Matters for Your Business Whether you run a shop, cafe or startup, understanding depreciation helps you in many ways:
See the real value : Find out what your equipment is truly worth today.
Save on taxes : Depreciation can help lower your taxes because it counts as a business expense.
Plan ahead : You’ll be able to plan for fixes or upgrades before they become a problem.
Clear reports : Keeps your financial reports accurate inside Swipe or your accounting software.
How to Calculate Depreciation There are 4 main methods used to calculate depreciation.
Each method gives a different yearly expense amount depending on how you use your asset.
M Method W what it means W When to use St straight line method E equal depreciation every year B best for the things used evenly (like fur furniture) D declining method M more depreciation in early years G good for items that lose value qu quickly (like gadgets) U units of production B based on actual usage M machines or vehicles S sum of years digit Fa fast depreciation in first years As assets productive in early years
Let’s understand each method step by step with examples
Straight Line Method This is the simplest and most common way to calculate depreciation.
Formula:
Depreciation = (Cost of Asset - Salvage Value) ÷ Useful Life
Example: Suppose you buy a refrigerator for your bakery for ₹50,000.
After 5 years, its expected value (salvage value) will be ₹5,000.
The refrigerator’s useful life is 5 years.
Using the formula:
Every year, you’d note down ₹9,000 as depreciation for the fridge. It’s straightforward, easy to keep track of and helps you plan ahead.
Use this when your asset works the same way every year.
Declining Balance Method This method gives higher depreciation in the early years and less later. It’s also called the reducing balance method .
Formula:
Depreciation = Book Value × Depreciation Rate.
Example :
You buy a computer for ₹80,000 and decide on a 40% depreciation rate.
YEAR BOOK VALUE(₹) DEPRECIATION(40%) REMAINING VALUE(₹) 1 80,000 32,000 48,000 2 48,000 19,200 28,800 3 28,500 11,520 17,280
The depreciation keeps decreasing each year.
Use this when your assets lose value faster, like electronics or vehicles.
Units of Production Method This method is based on how much you actually use the asset, not time.
Depreciation Based on Usage Sometimes, it makes more sense to calculate depreciation based on how much an asset is actually used.
Formula:
Example: Let’s say you buy a printing machine for ₹2,00,000. You expect that after years of use, its salvage value will be ₹20,000. The machine is expected to produce a total of 1,80,000 prints over its lifetime.
This year, the machine was used to make 30,000 prints.
So, the depreciation for this year would be:
This way, the depreciation reflects how much the machine was actually used, rather than just spreading it evenly over time.
Perfect for factories or businesses where usage matters more than time.
Sum of Years Digits Method This method is another fast depreciation technique .
This is another way to calculate depreciation and it’s handy when an asset gives more value in its early years.
How it works:
For example, if an asset has a life of 5 years, the sum of the years is:
Example:
Cost of asset: ₹1,00,000 Salvage value: ₹10,000 Depreciable value: ₹90,000 YEAR REMAINING LIFE CALCULATION DEPRECIATION (₹) 1 5 (5/15)×90,000 30,000 2 4 (4/15)×90,000 24,000 3 3 (3/15)×90,000 18,000 4 2 (2/15)×90,000 12,000 5 1 (1/15)×90,000 6,000
Great for machines that work heavily in the first few years.
Summary Table METHOD PATTERN BEST FOR DIFFICULTY Straight line Same every year General assets Easy Declining balance High early, low later Tech or vehicles Medium Units of production Based on usage Machines Medium Sum of years’ digits Fast early, slow later Productivity based assets Slightly complex
Step by Step: Recording Depreciation in Your Books Here’s how you can record depreciation easily and correctly:
List your assets : Add details like purchase date, cost and estimated life.
Choose your method : Pick the one that fits your asset type.
Calculate the yearly amount : Use the formulas shown above.
Make the journal entry :
Debit: Depreciation Expense
Credit: Accumulated Depreciation
Update your reports in Swipe : You can record depreciation as an expense entry so your reports always stay updated.
Pro Tip: In Swipe, you can track recurring expenses like depreciation monthly or yearly, so your reports stay neat automatically.
Example for a Small Business
Let’s say you run a small bakery.
You buy an oven for ₹1,00,000.
Salvage value = ₹10,000
Useful life = 5 years
Straight line depreciation = (₹1,00,000 - ₹10,000) ÷ 5 = ₹18,000 per year.
Every year, you record ₹18,000 as depreciation.
Your balance sheet shows the real value of the oven.
External Reference For detailed depreciation rules, visit the Government of India Income Tax Department website.
Conclusion Depreciation might sound like an accounting term, but it’s actually a smart way to track how your assets lose value over time .
Here’s what to remember:
It spreads the cost of your asset over its useful years.
Choose a method that matches your business needs.
Record depreciation regularly for accurate financials.
Use tools like Swipe Billing App to keep all expenses and reports up to date.
Ready to manage your assets and accounts effortlessly? Swipe Billing App , track your sales, purchases, expenses and depreciation in one simple place.
FAQs 1. What is the easiest way to calculate depreciation? The Straight Line Method is the simplest method, same amount every year.
2. Which method gives higher depreciation in early years? The Declining Balance and Sum of Years’ Digits methods.
3. Can depreciation be calculated monthly? Yes, you can work out the depreciation for each month by just dividing the yearly amount by 12.
4. Is depreciation mandatory for small businesses? It’s optional for internal reports, but recommended for accurate accounting and tax deductions.
5. What is salvage value? It’s the amount you expect to get when you sell or scrap the asset after its useful life.
6. What happens if I sell the asset before its life ends? Stop depreciating it, and record gain or loss (sale price minus book value).
Related Reads
Understanding Input Credit Tax (ITC) in GST
How to file GSTR-3B easily using Swipe
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