Depreciation: Why an asset loses value over time
Imagine you buy a brand-new smartphone for ₹50,000. After one year, if you try to sell it, you won't get ₹50,000 — you'll get maybe ₹35,000. After two years, even less. That drop in value is depreciation. It's not a penalty; it's the natural cost of using an asset.
Businesses face the same thing with machinery, vehicles, buildings, and computers. Depreciation lets them spread the cost of an asset over its useful life, matching the expense with the revenue it helps generate.
The core idea: two ways to think about it
There are two main formulas for depreciation. Which one you use depends on how the asset loses value.
1. Straight-Line Method (SLM) — equal loss every year
This assumes the asset loses the same amount of value each year. It's simple and common for assets like furniture or buildings.
Annual Depreciation=Useful LifeCost−Salvage Value
Where:
- Cost = what you paid (₹50,000 for the phone)
- Salvage Value = what you can sell it for at the end of its life (say ₹5,000 after 5 years)
- Useful Life = how many years it will be used (5 years)
Example: For the phone:
Annual depreciation = (50,000 − 5,000) / 5 = ₹9,000 per year.
After 1 year: book value = 50,000 − 9,000 = ₹41,000.
After 2 years: 41,000 − 9,000 = ₹32,000. And so on.
2. Written Down Value Method (WDV) — decreasing loss each year
This assumes the asset loses a fixed percentage of its remaining value each year. It's more realistic for assets like vehicles or electronics that lose value faster in early years.
Depreciation for the year=Book Value at start×Rate
Where Rate is a fixed percentage (say 20% per year).
Example: Same phone, 20% WDV rate:
Year 1: 50,000 × 0.20 = ₹10,000 depreciation. Book value = ₹40,000.
Year 2: 40,000 × 0.20 = ₹8,000 depreciation. Book value = ₹32,000.
Year 3: 32,000 × 0.20 = ₹6,400. Book value = ₹25,600.
Notice how the depreciation amount keeps shrinking — that's the "written down" part.
Which formula to use?
| Method | Best for | Key feature |
|---|
| Straight-Line | Buildings, furniture, patents | Equal expense every year |
| WDV | Vehicles, machinery, electronics | Higher expense early on |
In exams, if the problem gives you a rate (like 15% p.a.), it's almost always WDV. If it gives you a useful life and salvage value, it's straight-line.
The one formula you must remember for WDV over multiple years
If an asset costs ₹C and depreciates at rate r per year (as a decimal), its value after n years is:
Value after n years=C×(1−r)n …