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Published on:

March 15, 2026

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Types of depreciation in accounting with examples

Ever wonder why a brand-new car loses its value the second you drive it off the lot? Or why a company’s massive factory equipment is worth less today than it was last year? In the world of accounting, it's a process called depreciation. This article is a guide to types of depreciation in accounting with examples, like learning how to track the "life story" of a machine, also focusing on the importance and key variables under the type of accounting. It helps businesses stay honest about what their stuff is actually worth and ensures they aren't surprised when it’s finally time to buy a replacement

About Depreciation in Accounting

Depreciation in accounting means an asset slowly loses its value as time passes. When machines, equipment, or vehicles are used daily, they begin to wear out, become outdated and never like before. Because of this regular use and ageing, their value goes down year by year. Rather, instead of treating the total expense of a fixed asset in the year of purchase, a company can spread the expense over the number of years the asset will last.

For instance, picture a clothing manufacturing company purchasing a new sewing machine for Rs 2,00,000, and its lifespan is 10 years, meaning that with the help of depreciation, the company will not expense the entire Rs 2,00,000 in the very first year but will expense Rs 20,000 in expenses for 10 years.

Also read depreciation under Section 32 of income tax act.

Why does depreciation in accounting matter

It's a real expense : Even though you aren't sliding a credit card every month to pay for it, the value your machinery loses is a real cost. By recording this loss in the "Profit & Loss" account, a business can see its actual profit without pretending its gear is still brand new.
The fairness rule: Imagine buying a Rs 50,000 delivery truck. If you record that entire cost in the first month, it looks like your business is failing. Depreciation spreads the cost over the years the truck actually works, making the financial records way more realistic.
Nothing lasts forever : Machines break, tech gets outdated, and parts wear out. Depreciation is just the way businesses admit that their equipment is slowly heading toward retirement.
Saving on taxes: Depreciation counts as an expense, which lowers the "taxable income" of a company. Basically, it’s a legal way to pay less in taxes because the business is accounting for its ageing equipment.
Honest financial health: If a business wants to talk to an investor or a bank, they need to show what it is actually worth. It means that depreciation makes sure that "the books" reflect the true value of what is owned by this company
Consistency is the key: By treating the same kind of car as the same depreciation each year, it is easy to see how the business is doing this year compared to three years ago.

Also, read the golden rules of accounting

Four Types of Depreciation in Accounting

Different assets lose their value in different ways. Some wear out evenly, while others lose more value right at the start or based on how much they are used. Accounting uses different methods to record this loss so businesses can show the true value of their assets and calculate accurate profits. Below are listed types of depreciation ;

Straight line depreciation method

Basics: This is the simplest and most common method. The value of an asset decreases by the exact same amount every year during its useful life.

Formula : (Cost of Asset - Salvage Value) ÷ Asset’s Useful Life

Salvage value is equal to the asset's worth at the end of its useful life

Consider, for example, the cost of equipment Rs 1,00,000; useful life, 5 years; salvage value, 10,000;

Therefore, annual depreciation = 1,00,000 - 10,000 = Rs 90,000, and then divided by useful life, i.e., 5 years = Rs 18,000 as depreciation

Usefulness: It is easily calculable since it offers the same amount of depreciation every year. It helps with simple budgeting and planning, and it’s best for assets that are used evenly over time.

Declining Balance (Written Down Value) Method

Basics: This is an accelerated method. It charges higher depreciation in the early years and lower amounts later on. The calculations are made on the basis of the remaining value of the asset yearly

Formula: Book Value X Depreciation Rate

For example: A machine has been purchased for Rs. 2,00,000 and rate of depreciation is 20%

Depreciation during the first year = 2,00,000 x rate, i.e 20% = 40,000

Depreciation during second year = 1,60,000 x rate i.e 20%=32,000

Usefulness: It shows a faster loss in value during the first few years. It’s great for assets that become outdated quickly. It provides higher tax benefits at the beginning and reflects the real-world usage of technology and machines.

Units of production depreciation method

Basics: This method calculates depreciation based on how much the asset is actually used.The more an asset is in use, the more depreciation it shows.

Formula: ((Cost of Asset – Salvage Value) / Total Estimated Production) / Times Actual Production

The equipment will last 10 years, with its value as salvageage at the end of its useful life being ₹20,000, and the estimated total output of 15,000 units.

The production unit equals 2,000 units

Just as in the situation of Year 1:

Production unit is equal to 2,000 units

Depreciation amount =1,80,000 × 2,000 / 15,000 = ₹24,000

Under this, depreciation is charged on actual production each year

Usefulness: It matches the depreciation cost with the actual work done. It is a fair method for manufacturing and factory assets, and itgives an accurate expense based on real usage.

Sum-of-the-Years’-Digits (SYD) Depreciation Method

Basics: This is another accelerated method. It charges more depreciation in the early years and less in the later years based on how much "useful life" the asset has left.

Amount of Depreciation = 1,80,000 × 2000 / Formula : (Remaining Life / Sum of the Years’ Digits) x (Cost of Asset - Salvage Value)

For a 5-year asset, the sum of Years will be 5 + 4 + 3 + 2 + 1=15

First-Year Depreciation = (5 = Years Remaining / 15) × (Cost – Salvage Value)

Second year depreciation =(4/15 ) × (Cost − Salvage Value) and so on till the 5th year

Another example for 4 year asset

Sum of the year =4+3+2+1 =10

First year depreciation = (4 = years remaining /15) × (Cost − Salvage Value)

Second year depreciation = (3/15 ) × (Cost − Salvage Value) and so on till the 4th year

Usefulness: It’s suitable for assets that are most useful when they are brand new. It shows a realistic reduction in value, and it helps with better financial planning.

Variable under types of depreciation

Cost of the Asset: This isn't just the price tag you see at the store. The "cost" includes the purchase price plus every other penny spent to get the asset ready to work. This means things like: Shipping and transportation (freight), Installation and setup and Insurance during travel and any commissions paid.
Salvage value: It’s the amount of money the business thinks it can get by selling the asset once it's done using it. To get the final number, you take the sale price and subtract any expenses it takes to get rid of the item.
Estimated useful life: This is how long the business expects to actually use the asset to make money. It’s not necessarily how long the item will physically last. The equipment may still be in “good shape” after five years, but if it’s not fast enough to keep up with production, then its economic life is completed.
Asset Age: When things are older, they are likely to be less efficient and more in need of repair. This "asset age" can lead to lower productivity and higher maintenance costs. Eventually, the age of the asset is what forces a company to replace it altogether.

Conclusion

Overall, depreciation is just a way of being organised and honest about the future. Whether a business uses the simple Straight-Line method or a more complex Units of Production style, the goal is the same: making sure the financial books match the reality status. By understanding these methods, you can see how companies plan for the long haul and keep their equipment—and their bank accounts—running smoothly

Checkout Swipe’s free online accounting software: Click here .

FAQs

1.What is the easiest type of depreciation to use?

The straight-line method is the method people use the most, which is just plain easy. Essentially, all you do is take the cost of what you bought, or however many years you’re going to use it, or it just averages out.

2.What happens to an asset when it is fully depreciated?

Once an asset is fully depreciated, its "book value" (what it’s worth on your official records) drops to its salvage value, which is just the leftover scrap value. Even though the accounting side says it’s "done," many businesses keep using the equipment as long as it still works and gets the job done.

3.What are some common mistakes to watch out for in case of depreciation?

While handling depreciation, the common mistakes are picking the wrong calculation method for the asset. Another big mistake is forgetting to include the salvage value or" of the item incorrectly and not staying on top of changing tax laws in India.

4.What is the difference between Depreciation and Amortization?

Depreciation is for "tangible" stuff you can actually touch, like tools, machines, or buildings, and it accounts for the basic wear and tear that happens as things get old. Amortisation is for "intangible" things that you can’t touch but still own, like copyrights and patents.

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