Accounting · Depreciation and Amortisation

Meaning and Features of Depreciation (CA Foundation Accounting)

Updated 1 October 2026

Depreciation is the systematic allocation of the depreciable amount of a fixed asset over its useful life. It is charged because assets lose value through use, time or obsolescence. The amount depends on cost, estimated useful life and residual value. To solve questions, find these three inputs, then apply the stated method.

Understand Meaning and Features of Depreciation

A business buys a machine for ₹5,00,000 and uses it for years. The machine does not give benefit only in the year of purchase. So its cost should not be charged to profit in one year. Depreciation spreads the cost over the years in which the asset helps earn revenue. This follows the matching concept.

Depreciation is now governed by AS 10 (Property, Plant and Equipment), which replaced the older AS 6 (Depreciation Accounting). AS 6 has been superseded, but its definitions are still used in teaching, so you will see them in textbooks and questions. Based on the wording of AS 6, depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, passage of time or obsolescence through technology and market changes. It is allocated to accounting periods during the useful life. Depreciation is a charge against profit. It is a non-cash expense: no cash leaves the business when you charge it. It is normally charged to the Profit and Loss Account, except where it is allowed to be included in the cost of another asset (for example, during construction).

Causes of depreciation:
- Wear and tear from physical use.
- Passage of time, such as the expiry of a lease or patent, even if the asset is unused.
- Obsolescence: the asset becomes out of date because of new technology or a change in demand.
- Accident or abnormal factors, such as damage. Treat large sudden losses carefully, as they are usually a loss and not normal depreciation.

Factors that decide the amount:
- Historical cost of the asset, including purchase price, freight, installation and other costs needed to bring it to working condition.
- Estimated useful life, the period over which the asset is expected to be used by the enterprise (or the number of production units expected).
- Estimated residual (scrap) value at the end of useful life.

The depreciable amount is cost less residual value. The useful life should be estimated and reviewed periodically. Land is normally not depreciated, because it generally has an unlimited life.

Do not mix up three terms. Depreciation applies to tangible fixed assets like machinery. Depletion applies to wasting natural resources like mines and oil wells, as the resource is extracted. Amortisation applies to intangible assets like patents, copyrights and licences. AS 10 deals with accounting for tangible fixed assets (property, plant and equipment), including the depreciation charged on them. Under the Accounting Standards framework, amortisation of intangibles falls under AS 26. Companies that follow Ind AS apply Ind AS 38 instead.

Key rules to remember

Depreciable amount: Depreciable amount = Cost of asset − Estimated residual value; Cost includes freight, installation and other costs to bring the asset to use.
Cost of asset: Cost = Purchase price + Freight + Installation + Other directly attributable costs; Trade discounts reduce the cost. Repairs of routine nature are not added.
Straight line depreciation per year: Annual depreciation = (Cost − Residual value) ÷ Estimated useful life in years; Use this as the base for explaining how the three factors work together. Full method is a separate topic.
Depreciation rule (AS 10): Depreciation is charged on the depreciable amount over the useful life, normally to the Profit and Loss Account; It is charged whether or not the business made a profit in the year. The exception is where it is allowed to be included in the cost of another asset, for example during construction.

How to solve Meaning and Features of Depreciation questions

Use this method for theory and numerical questions on the meaning, causes and factors of depreciation.

1Read the question and mark what is asked: definition, causes, factors, a distinction, or a calculation.
2For a definition, write the core idea: systematic allocation of depreciable amount over useful life, due to use, time or obsolescence.
3For causes, list wear and tear, passage of time, obsolescence and abnormal factors, with a one-line example for each.
4For factors, name cost, estimated useful life and residual value, and explain how each changes the charge.
5For numbers, first compute the cost: add freight, installation and similar costs, deduct trade discount.
6Find the depreciable amount: cost less residual value. Then apply the given method and period.
7Pass the entry if asked: Depreciation A/c Dr. to Asset A/c if the asset is shown at net book value, or Depreciation A/c Dr. to Provision for Depreciation A/c if the asset is kept at original cost. Then transfer Depreciation A/c to Profit and Loss A/c.
8State the conclusion in one line, such as the annual charge or the correct term.

Quickest way: Three-input check

When to use it: Use when you have limited time and the question mixes theory with a small calculation.

Write the three inputs at the top: Cost, Life, Residual value.
Fix the cost first. Most lost marks come from forgetting installation or freight.
Compute depreciable amount before dividing by life.
For theory, write four causes and three factors as short bullets with one example each.
For distinction questions, use one line each: depreciation for tangible assets, depletion for natural resources, amortisation for intangibles.

Common mistakes in Meaning and Features of Depreciation

Treating depreciation as a source of cash or saying it reduces cash.
Students see it as an expense and assume money is paid.
Fix: Remember it is a non-cash charge. It reduces profit and asset book value, not cash.
Ignoring installation and freight when finding the cost.
Students use only the invoice price.
Fix: Add all costs needed to bring the asset to working condition before computing depreciation.
Depreciating land.
Students apply depreciation to every fixed asset.
Fix: Land generally has an unlimited life, so it is not normally depreciated. Check the question for exceptions such as a leasehold.
Confusing depreciation, depletion and amortisation.
All three write off an asset's cost over time.
Fix: Match the asset type: tangible asset, natural resource, or intangible asset. Amortisation of intangibles is under AS 26 in the Accounting Standards framework, and under Ind AS 38 for Ind AS companies.
Dividing the full cost by life and forgetting residual value.
Students skip the scrap value given in the question.
Fix: Always subtract residual value first to get the depreciable amount.
Saying depreciation is charged only when there is profit.
Students link it with profit availability.
Fix: State that depreciation is charged every year of the asset's life, even in loss years. The entry is Depreciation A/c Dr. to Asset A/c if the asset is shown at net book value, or Depreciation A/c Dr. to Provision for Depreciation A/c if the asset is kept at original cost.

Worked examples

Example 1

A company buys a machine for ₹4,50,000, pays freight of ₹20,000 and installation charges of ₹30,000. Estimated useful life is 10 years and estimated residual value is ₹50,000. Find the depreciable amount and annual depreciation using the straight line approach.

Show the solution

Cost of machine = 4,50,000 + 20,000 + 30,000 = ₹5,00,000.
Depreciable amount = 5,00,000 − 50,000 = ₹4,50,000.
Annual depreciation = 4,50,000 ÷ 10 = ₹45,000.

Answer: Depreciable amount is ₹4,50,000 and annual depreciation is ₹45,000.

Example 2

Explain the causes of depreciation and name the factors that determine the amount of depreciation.

Show the solution

Define: depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Causes: wear and tear from use; passage of time (for example, expiry of a patent or lease); obsolescence from new technology or changed demand; and abnormal factors such as accident.
Factors: the historical cost of the asset, including costs to bring it to use.
Factor: the estimated useful life, in years or units of output.
Factor: the estimated residual value at the end of useful life.
Add that depreciable amount = cost − residual value, and that useful life should be reviewed periodically.

Answer: Causes are wear and tear, passage of time, obsolescence and abnormal factors. The amount depends on cost, estimated useful life and estimated residual value.

Exam tips

Write the definition in your own words, with the three ideas: allocation, useful life, and use, time or obsolescence.
In calculations, show the cost build-up line first. Step marks are often given for it.
Give one example for each cause. It makes a short theory answer look complete.
For a difference question, write depreciation, depletion and amortisation with the asset type in each line.
Do not forget to state that depreciation is a non-cash charge, normally made to the Profit and Loss Account.

Practice questions from Depreciation and Amortisation

Meaning and Features of Depreciation: frequently asked questions

What is depreciation in simple words?

It is the part of an asset's cost that you charge as an expense each year. The asset helps earn income over several years, so its cost is spread over those years.

What is the difference between depreciation, depletion and amortisation?

Depreciation is for tangible fixed assets such as machinery. Depletion is for natural resources such as mines. Amortisation is for intangible assets such as patents and licences.

Is depreciation charged on land?

Normally no, because land has an unlimited life. Some situations, such as leasehold land, may be treated differently, so follow the facts given in the question.

Why is depreciation charged if no cash is paid?

The cash was paid when the asset was bought. Depreciation matches that cost with the revenue the asset helps earn, so profit is not overstated.