Depreciation Methods
Depreciation is a method used in accounting to show the reduction in the value of an asset over time. Assets are physical things like buildings, cars, or computers that a business owns. Over time, these items lose value due to regular use or getting old. This process is known as wear and tear. Instead of showing the full cost of an item in the first year, we spread the cost over its useful life. This helps a bank or business match its expenses with the income it earns.
Concepts (3)
While depreciation is for physical assets, amortization is for intangible assets. Intangible assets are things you cannot touch, like software, patents, or brand value.
While depreciation is for physical assets, amortization is for intangible assets. Intangible assets are things you cannot touch, like software, patents, or brand value. For a bank, the cost of a new banking software is spread over its useful life using amortization. The logic is the same as depreciation, but the term used is different.
This is the simplest method of depreciation. The total cost of the asset is divided by its expected years of life. This results in the same amount being deducted every year.
This is the simplest method of depreciation. The total cost of the asset is divided by its expected years of life. This results in the same amount being deducted every year. It is best for assets where the usage is consistent over time, like furniture. For example, a ₹10,000 table with a 10-year life has ₹1,000 depreciation every year.
This method is also called the Reducing Balance Method. Depreciation is calculated as a percentage of the current book value (cost minus previous depreciation). Since the book value drops every year, the depreciation amount also drops.
This method is also called the Reducing Balance Method. Depreciation is calculated as a percentage of the current book value (cost minus previous depreciation). Since the book value drops every year, the depreciation amount also drops. This is realistic for machines that require more maintenance as they get older. Most Indian banks use this for tax efficiency.
Ready to practice? Start an interactive lesson.
Start Lesson: Amortization