Fundamentals of Accounting · Depreciation and Amortization

Meaning and Concept of Depreciation for CSEET

Updated 11 October 2026 · Fact-checked

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. You charge it each year as an expense because the asset helps earn revenue over many years. It is a non-cash charge. It does not mean setting aside money or valuing the asset at market price.

Understand Meaning and Concept of Depreciation

A business buys a machine for ₹5,00,000 and uses it for five years. The machine helps earn income in every one of those years. If you charged the full ₹5,00,000 as an expense in year one, profit for that year would look too low and later years too high. Depreciation fixes this by spreading the cost over the years of use.

AS 10 defines depreciation as the systematic allocation of the depreciable amount of an asset over its useful life. Two words matter here. Systematic means you follow a method, not a guess each year. Allocation means you are spreading cost, not measuring the fall in market value.

The depreciable amount is the cost of the asset less its residual value. Residual value is what you expect to get when the asset is finally disposed of. Useful life is the period over which the asset is expected to be used by the business. AS 10 also says residual value and useful life should be reviewed at least at each financial year-end.

Causes of depreciation:
- Wear and tear: physical use of a machine or vehicle.
- Passage of time (effluxion of time): a lease or patent loses value as years pass, even if unused.
- Obsolescence: a new technology makes the old asset out of date, such as an old computer.
- Accident or abnormal loss: damage that shortens life.
- Exhaustion: a mine or quarry gets used up as material is extracted.

Depreciation, depletion and amortization all spread cost, but they apply to different assets:
- Depreciation: tangible fixed assets such as machinery, buildings, furniture.
- Depletion: wasting natural resources such as mines, oil wells, quarries. It is based on the quantity extracted.
- Amortization: intangible assets such as patents, copyrights, trademarks and leases. It is spread over their useful life.

Depreciation is not a cash outflow. The cash left the business when you bought the asset. The yearly charge only reduces profit and the book value of the asset. Land is normally not depreciated, because it generally has an unlimited life.

Key rules to remember

Definition (AS 10): Depreciation = systematic allocation of the depreciable amount of an asset over its useful life; Quote this wording in written answers. It is the standard's own definition.
Depreciable amount: Depreciable amount = Cost of asset − Residual value; Residual value is the expected amount on disposal at the end of useful life.
Carrying amount: Carrying amount = Cost − Accumulated depreciation; Also called book value or written down value in the books.
Journal entry for depreciation: Depreciation A/c Dr. ; To Asset A/c (or Provision for Depreciation A/c); At year-end, Depreciation A/c is closed to Profit and Loss Account.

How to solve Meaning and Concept of Depreciation questions

Use this method for any theory or short question on the meaning and concept of depreciation.

1Start with the definition: depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
2Explain the reason in one line: cost is spread so that each year's profit is matched with the use of the asset.
3State what is depreciable: cost less residual value, over useful life.
4List the causes with one short example each: wear and tear, time, obsolescence, accident, exhaustion.
5If asked to differentiate, name the type of asset for each term: tangible for depreciation, natural resources for depletion, intangible for amortization.
6Add that depreciation is a non-cash charge and is not a valuation of the asset at market price.
7For a numerical, find depreciable amount first, then apply the stated method and year.

Quickest way: Asset-type test for depreciation, depletion or amortization

When to use it: Use this in MCQs and short differentiation questions where you must pick the right term quickly.

Look at the asset. Can you touch it (machine, building)? Answer: depreciation.
Is it a mine, quarry, oil or gas well? Answer: depletion.
Is it a patent, copyright, trademark, licence or lease with no physical form? Answer: amortization.
Is it land? Normally no depreciation is charged.
If the cause is a newer model arriving, the cause is obsolescence.

Common mistakes in Meaning and Concept of Depreciation

Saying depreciation is the fall in market value of an asset.
In daily life, a used car's value falls and students link it to depreciation.
Fix: Write that depreciation is allocation of cost over useful life, as AS 10 defines it, not market valuation.
Treating depreciation as cash set aside to replace the asset.
The word 'provision' suggests a fund of money.
Fix: Remember depreciation is a non-cash expense. No cash leaves the business when you charge it.
Depreciating the full cost without considering residual value.
Students forget the asset may be sold for some amount at the end.
Fix: Depreciable amount is cost less residual value. Check whether the question gives a scrap value.
Using depreciation, depletion and amortization as the same thing.
All three spread cost, so they look alike.
Fix: Match each to its asset: tangible, natural resource, intangible.
Charging depreciation on land.
Land is a fixed asset, so students assume all fixed assets depreciate.
Fix: Land generally has an unlimited life, so it is normally not depreciated.
Listing causes without examples.
Students memorise names only.
Fix: Add a short example to each cause, such as a lease for passage of time and an old computer for obsolescence.

Worked examples

Example 1

Define depreciation and explain any three causes with examples.

Show the solution

Definition: depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Cause 1, wear and tear: a delivery van loses its working capacity as it runs on roads every day.
Cause 2, obsolescence: a company's old computers become out of date when faster systems arrive, though they still work.
Cause 3, passage of time: a 10-year lease of a shop loses value each year as the lease period runs out, whether or not the shop is used.
Conclude that depreciation is a non-cash charge to profit and loss.

Answer: Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Three causes are wear and tear, obsolescence and passage of time, as explained above.

Example 2

A machine costs ₹6,00,000. Its expected residual value is ₹60,000 and useful life is 9 years. Find the depreciable amount and the carrying amount after the asset has accumulated depreciation of ₹1,20,000.

Show the solution

Depreciable amount = Cost − Residual value
= ₹6,00,000 − ₹60,000 = ₹5,40,000
Carrying amount = Cost − Accumulated depreciation
= ₹6,00,000 − ₹1,20,000 = ₹4,80,000

Answer: Depreciable amount is ₹5,40,000 and carrying amount is ₹4,80,000.

Exam tips

Begin every theory answer with the AS 10 definition. It earns the first marks quickly.
In 'causes' questions, give each cause a one-line example. Examiners look for these.
In differentiation questions, make the asset type the first point of comparison.
Do not call depreciation a fund or a valuation. Both are common wrong ideas.
In numericals, compute depreciable amount before anything else and check for residual value.

Practice questions from Depreciation and Amortization

Meaning and Concept of Depreciation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Meaning and Concept of Depreciation: frequently asked questions

What is depreciation in accounting?

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. It spreads the cost of an asset across the years in which it helps earn income. It is charged as an expense to the profit and loss account.

What are the main causes of depreciation?

The main causes are wear and tear, passage of time, obsolescence, accident and exhaustion of natural resources. Each reduces the useful life or usefulness of the asset. Give a short example for each in your answer.

What is the difference between depreciation, depletion and amortization?

Depreciation applies to tangible fixed assets like machinery. Depletion applies to natural resources like mines and oil wells. Amortization applies to intangible assets like patents and copyrights.

Is depreciation a cash expense?

No. The cash was paid when the asset was bought. Depreciation only reduces profit and the carrying amount of the asset, so no cash leaves the business when you charge it.