ICAI’s AS 10 on Property, Plant and Equipment defines depreciation as a systematic allocation of an asset’s depreciable amount over its useful life. That framing matters because depreciation is not just a formula. It is an accounting estimate about how an asset’s economic benefits are consumed. Once that is clear, the choice of method becomes a judgment question, not a habit.
What depreciation methods are really trying to do
A good depreciation method matches expense recognition with the pattern in which the asset is expected to be used. Under AS 10, the method should reflect that pattern, should be reviewed at least at each financial year-end, and should be changed if the consumption pattern changes. AS 10 also states that a revenue-based method is not appropriate for property, plant and equipment.
In practice, most readers are deciding among three broad methods:
| Method | How the charge behaves | Usually fits best when | Typical strength | Typical limitation |
|---|---|---|---|---|
| Straight line method | Equal expense each year | Benefits are consumed fairly evenly | Simple and stable | May understate early-year consumption for fast-obsolescing assets |
| Written down value method | Higher expense in earlier years and lower later | Utility, efficiency, or economic value declines faster in early years | Often tracks real wear or obsolescence better | Less intuitive for budgeting and period comparison |
| Units of production method | Expense varies with actual output or usage | Consumption is driven by units produced, hours run, or similar usage data | Strong matching where usage data is reliable | Needs robust operational records |
Straight line method
Under the straight line method, the depreciable amount is spread evenly over useful life.
Assumptions for illustration: machine cost Rs 10,00,000; residual value Rs 1,00,000; useful life 5 years; no change in estimate during the period.
Depreciable amount = Rs 10,00,000 - Rs 1,00,000 = Rs 9,00,000.
Annual depreciation = Rs 9,00,000 / 5 = Rs 1,80,000.
If the machine starts the year in a condition ready for use and nothing changes in estimate, the charge remains Rs 1,80,000 per full year.
This method is commonly suitable for assets such as office furniture, buildings used in a stable manner, and equipment whose service potential is consumed broadly evenly over time.
Written down value method
Written down value, also called diminishing balance, applies depreciation to the opening carrying amount each period. The result is a higher charge in earlier years and a lower charge later.
Assumptions for illustration: machine cost ₹10,00,000; residual value ₹1,00,000; a 30% diminishing-balance rate used only for this example; full-year use in each year. The first three years are shown below.
| Year | Opening carrying amount | Depreciation at 30% | Closing carrying amount |
|---|---|---|---|
| 1 | Rs 10,00,000 | Rs 3,00,000 | Rs 7,00,000 |
| 2 | Rs 7,00,000 | Rs 2,10,000 | Rs 4,90,000 |
| 3 | Rs 4,90,000 | Rs 1,47,000 | Rs 3,43,000 |
After Year 3, the carrying amount is ₹3,43,000, which is still above the ₹1,00,000 residual value. Depreciation would continue in later years, but the asset should not be depreciated below its residual value while that estimate remains unchanged. The 30% rate here is an illustration, not a tax rate or a rate prescribed for every machine.
The pattern suits assets that deliver more utility in earlier years, become technologically dated quickly, or incur rising repair costs later. Vehicles, some plant, and certain electronic equipment often fit this logic better than straight line.
The rate used in books should come from the chosen accounting policy and useful-life estimate. It should not be assumed from a tax table unless that also reflects the actual consumption pattern for financial reporting.
Units of production method
This method links depreciation to actual usage rather than time.
Assumptions for illustration: machine cost Rs 10,00,000; residual value Rs 1,00,000; expected lifetime output 1,00,000 units.
Depreciable amount = Rs 9,00,000, so depreciation per unit = Rs 9.
If actual production in Year 1 is 18,000 units, depreciation for Year 1 is 18,000 x Rs 9 = Rs 1,62,000.
This method is often more persuasive than either straight line or written down value when usage is highly uneven across years and reliable output data is available.
How to choose the right method
The method should follow the asset’s consumption pattern, not the profit target. A useful selection framework is:
- Choose straight line when service potential is consumed evenly over time.
- Choose written down value when the asset is more productive, more marketable, or more economically useful in earlier years.
- Choose units of production when actual output or operating hours are the best evidence of consumption.
- Review whether component accounting is needed for significant parts with different useful lives. The separate AS 10 and Schedule II component-accounting guide explains that assessment.
- Revisit the method when business use changes materially, not merely because profits need smoothing.
Indian reporting context that changes the answer
For companies, Schedule II to the Companies Act, 2013 on India Code sets the company-law useful-life framework. Part C gives useful lives for specified assets. A company using a different useful life or a residual value above 5% of original cost must disclose the difference and provide a justification supported by technical advice. Schedule II also requires a significant part with a different useful life to be depreciated separately.
For entities following Accounting Standards, AS 10 remains the main accounting source. Ind AS reporters should use Ind AS 16; ICAI's 2025–26 Ind AS compendium, Volume I contains the current text. The two frameworks share the central idea: choose a method that reflects the expected consumption pattern and review the relevant estimates periodically. For a focused Ind AS example, see the Ind AS 16 component-accounting guide.
Book depreciation and tax depreciation are not the same exercise
One of the most common confusions is treating book depreciation and income-tax depreciation as if they must be identical. They serve different purposes. Book depreciation under AS 10, Ind AS 16, and company-law useful-life requirements is aimed at fair financial reporting. Tax depreciation under the Income-tax law works through its own block-based rules and prescribed rates. That is why the book charge in the financial statements may differ from the tax deduction without either figure being wrong.
Professional judgment points that deserve attention
- Land is generally not depreciated, while buildings usually are; they are accounted for separately.
- Depreciation begins when the asset is available for use, not only when commercial production starts.
- Depreciation does not automatically stop just because the asset is idle.
- Residual value and useful life are separate estimates from the method itself; all three need disciplined review.
- A change in method is generally a change in accounting estimate, so the rationale and financial effect should be documented carefully.
Bottom line
Depreciation method selection is really about matching. Straight line works where benefits are even, written down value works where benefits decline faster in earlier years, and units of production works where usage drives consumption. In Indian practice, the choice sits inside a wider framework of AS 10 or Ind AS 16, plus Schedule II for companies. If the chosen method clearly reflects how the asset is consumed, the accounting is usually on the right track.
