Depreciation Methods in Practice

The straight-line formula, worked

Annual depreciation = (cost − residual value) ÷ useful life.

Take a surface grinding machine costing ₹9,20,000, with a 10-year useful life and residual value of 5% of cost:

• —Residual value: 5% of ₹9,20,000 = ₹46,000
• —Depreciable amount: ₹9,20,000 − ₹46,000 = ₹8,74,000
• —Annual charge: ₹8,74,000 ÷ 10 = ₹87,400 per year

Why residual value comes off first

An asset is not expected to be worthless the day its useful life ends — it typically still has value, even as scrap. Depreciation should only recognise the portion of cost the business actually expects to consume through use: ₹8,74,000 here, not the full ₹9,20,000.

Ignoring residual value overstates depreciation expense every single year, understates profit, and leaves the asset carried at zero while it still has real resale value.

Building net block

Net block = cost − accumulated depreciation.

For the same machine acquired 1 August 2023, roughly 2 years and 8 months had elapsed by the FY2025-26 close. Accumulated depreciation: ₹2,33,066.67 — consistent with about 2.67 years at ₹87,400, not an exact round multiple because partial-year depreciation applies in the year of acquisition.

Net block: ₹9,20,000 − ₹2,33,066.67 = ₹6,86,933.33.

Straight-line vs reducing balance

Give two identical assets the same cost, life and residual value, but depreciate one straight-line and one reducing-balance. Which shows higher expense in year one?

Reducing balance. It applies a fixed percentage to the asset’s remaining book value each year, which is highest at the start — so charges are large early and shrink over time. Straight-line charges the identical amount every year.

Total depreciation across the full life is the same either way. What differs is when the expense is recognised — and therefore reported profit in each individual year.

Choosing the method honestly

The method should reflect how the asset actually delivers benefit, not which profit profile is convenient.

• —Straight-line suits assets giving roughly even benefit across their working life — machinery, furniture, vehicles, office equipment.
• —Reducing balance suits assets that genuinely lose most of their economic value and productivity early — fast-obsolescing technology, for instance.

Reconcile the register to the control account

One check worth running every period: sum accumulated depreciation across every asset in the fixed asset register and confirm the total agrees to the Accumulated Depreciation control account in the general ledger.

It is the same subledger-to-control discipline used for receivables and payables, applied to depreciation — and it catches assets added to the register but never posted, or posted twice.

Common mistakes

• —Depreciating the full cost without deducting residual value.
• —Charging a full year in the year of acquisition when the asset was bought mid-year.
• —Continuing to depreciate an asset below its residual value.
• —Choosing a method for its profit profile rather than how the asset is actually consumed.
• —Never reconciling the register total back to the control account.