Finance · business glossary
What is Depreciation?
By Shivam Bhandari · Reviewed 31 October 2026 · How we write
definition
The accounting practice of spreading the cost of a long-lasting asset (like machinery) across the years it's actually used, rather than expensing it all at once.
Depreciation explained
Depreciation spreads the cost of a long-lasting asset, such as machinery or vehicles, over the years it will be used, instead of counting it all as a cost in the year of purchase.
formula
Straight-line depreciation per year = (Cost − Residual value) ÷ Useful life in years
example
A ₹5 lakh machine expected to last 5 years with no resale value depreciates by ₹1 lakh a year.
why it matters
It gives a truer picture of yearly profit and affects taxable income.
common mistake
Forgetting that depreciation is not a cash payment — the cash left when the asset was bought.
Frequently asked questions
What is Depreciation?
The accounting practice of spreading the cost of a long-lasting asset (like machinery) across the years it's actually used, rather than expensing it all at once. Depreciation spreads the cost of a long-lasting asset, such as machinery or vehicles, over the years it will be used, instead of counting it all as a cost in the year of purchase.
How do you calculate Depreciation?
Straight-line depreciation per year = (Cost − Residual value) ÷ Useful life in years. A ₹5 lakh machine expected to last 5 years with no resale value depreciates by ₹1 lakh a year.
Why does Depreciation matter?
It gives a truer picture of yearly profit and affects taxable income.
What is a common mistake with Depreciation?
Forgetting that depreciation is not a cash payment — the cash left when the asset was bought.
Related terms
EBITDA
Earnings before interest, tax, depreciation, and amortisation — a measure of operating profitability that strips out financing and accounting decisions to make businesses easier to compare.
Net margin
The percentage of revenue left as actual profit after every cost — direct, overhead, interest, and tax — has been subtracted.
ROCE (return on capital employed)
How efficiently a business turns the total capital invested in it — both debt and equity — into operating profit.