Depreciation
Also called: asset depreciation
What is Depreciation?
Depreciation spreads the cost of a fixed asset across the years it is expected to be useful, instead of charging the whole amount in the year of purchase. It is a non-cash expense that reduces both profit and the asset's book value.
Why Depreciation matters
Without depreciation, buying an oven makes one month look terrible and every following month look artificially good. It is also a genuine cost: equipment wears out and must eventually be replaced.
Depreciation formula
Straight-line depreciation = (Cost − Salvage value) ÷ Useful life in years
Written-down value instead applies a fixed percentage to the reducing balance.
How Depreciation works in practice
Pick a method and useful life per asset class and apply it consistently. Note that accounting depreciation and the rates permitted for tax often differ, so two schedules are normal.
Worked example
A ₹3,00,000 oven with a ₹30,000 salvage value over 6 years depreciates at ₹45,000 a year.
Frequently asked questions
No cash moves, but the cost is real — the asset is being consumed and will need replacing.