Depreciation is the systematic process of spreading the cost of a tangible fixed asset over the period it is expected to be used, reflecting its gradual reduction in value due to wear and tear, aging, or obsolescence. In India, companies are required to calculate depreciation following the guidelines of both the Companies Act, 2013 and the Income Tax Act (IT Act), 1961. Although both approaches deal with the reduction in asset value over time, they differ in purpose, calculation methods, and applicable rates. Companies Act: Depreciation under the Companies Act is intended for financial reporting purposes. It ensures that the cost of assets is fairly reflected in the profit and loss statement and the balance sheet. Companies can use either the Straight-Line Method (SLM) or the Written Down Value (WDV) method, and the useful life of assets is generally determined as per Schedule II of the Companies Act. IT Act: Depreciation under the IT Act is used for tax purposes. The amount of depreciation allowed reduces taxable income, thereby affecting the company’s income tax liability. For tax purposes, the WDV method is generally applied, and rates are specified for different classes of assets.

Accounting for assets involves two important processes: amortisation, which deals with the systematic allocation of intangible asset costs, and disposal, which involves removing assets from the books when they are sold, retired, or scrapped. Understanding both is essential for accurate financial reporting and matching expenses with revenues.