Asset Depreciation

Definition

A delivery company buys 10 vehicles for Rs 80 lakh each. Those vehicles won't last forever, they'll wear out, technology will evolve, and eventually they'll be worth scrap value. Depreciation is the accounting mechanism that recognises this reality, spreading the Rs 8 crore cost across the years those vehicles generate revenue. Each year, a depreciation charge hits the P&L as an expense, and the vehicles' carrying value on the balance sheet decreases. Without depreciation, the year you buy the vehicles would show a massive loss, and subsequent years would show artificially inflated profits. Neither would reflect reality.

In India, you operate under two depreciation regimes simultaneously. For financial reporting, Schedule II of the Companies Act, 2013, prescribes useful lives for various asset categories, and you choose between the Straight-Line Method (same charge every year) or Written-Down Value method (higher charges early, declining over time). For income tax, Section 32 of the Income Tax Act specifies WDV rates by asset block: 15% for plant and machinery, 30% for computers, 10% for furniture. These rates rarely match the book depreciation, which creates deferred tax assets or liabilities, an area that invariably attracts auditor attention.

The Fixed Asset Register is where it all comes together. Every asset must be individually tracked: original cost, purchase date, depreciation method, accumulated depreciation, and current net book value. Auditors physically verify assets against register records during statutory audits. Here's what trips up even experienced accountants: fully depreciated assets. A machine that's been written down to zero but is still sitting on your factory floor and generating output must remain in the FAR until it's physically disposed of. And when you do sell a depreciated asset, GST applies on the transaction value (not original cost), and the ITC you claimed at purchase doesn't need reversal, provided the asset was used for taxable supplies throughout its life.

Key Points

• Depreciation matches a tangible asset's cost to the periods it generates revenue, preventing distorted year-on-year profit comparisons.
• Two rule books: Schedule II of the Companies Act (financial reporting) and Section 32 of the Income Tax Act (tax depreciation).
• SLM charges the same amount annually; WDV applies a fixed percentage to the declining balance, front-loading the expense.
• Differences between book and tax depreciation create deferred tax assets or liabilities: a key audit focus area.
• Every asset needs individual tracking in a Fixed Asset Register, including fully depreciated assets still in use.
• Selling a depreciated asset attracts GST on transaction value. ITC claimed on purchase doesn't need reversal if the asset was used for taxable supplies.