Fixed Assets & Depreciation

Bisht Ji is excited today. He walks into Sharma Sir's office carrying a folder of papers and a wide smile. "Sharma Sir, I bought a new delivery truck! A Tata Intra V30 — Rs 8,00,000. Now my deliveries will reach Almora, Pithoragarh, even Munsyari on time!" Sharma Sir congratulates him and then says, "Wonderful, Bisht Ji. Now we need to record this in your books properly. Meera, do you know what a fixed asset is?" Meera shakes her head. Sharma Sir pulls up a chair. "Time for a new lesson."

What are Fixed Assets?

"Meera, when Bisht Ji buys turmeric from a farmer, what does he do with it?"

"He sells it to his customers," Meera replies.

"Correct. The turmeric comes in and goes out. It is stock — meant to be sold. But this truck — is Bisht Ji going to sell this truck?"

"No. He's going to use it for deliveries."

"Exactly. A fixed asset is something a business buys NOT to sell, but to USE for a long time — usually more than one year."

Fixed Asset = Something a business owns and uses for more than one year to run its operations. It is not meant for sale. Examples: building, vehicle, computer, furniture, machinery.

Sharma Sir lists common fixed assets:

"Think of Bisht Ji's business. He has:"

"All of these are fixed assets. They help the business run, but they are not for sale."

Fixed Assets vs Current Assets

"There is an important difference between fixed assets and current assets," Sharma Sir adds.

"Bisht Ji's truck is a fixed asset. Bisht Ji's stock of turmeric is a current asset."

Why Do Fixed Assets Lose Value?

Sharma Sir picks up a marker and draws two trucks on the whiteboard — one shiny and new, one old and battered.

"Meera, if someone offered you a brand-new truck and a 5-year-old truck of the same model, which would you pay more for?"

"The new one, obviously."

"Why?"

"Because the old one has been used. It might have problems. Parts might be worn out. It's... old."

"Exactly. Over time, fixed assets lose value. This happens because of three reasons:"

1. Wear and Tear

"The truck is driven every day on hilly Uttarakhand roads — Haldwani to Almora, Bageshwar to Munsyari. The engine wears out. The tyres wear down. The body gets scratched and dented. Every kilometre reduces its value."

2. Passage of Time

"Even if the truck is parked in a garage and never used, it still loses value. Why? Because a newer, better model comes out. Technology improves. The old truck becomes outdated. A 2025 truck is worth less in 2028 even if it has never been driven."

3. Obsolescence

"A computer bought today will be slow and outdated in 4-5 years. Software changes. Hardware improves. The old computer cannot keep up. This is obsolescence — the asset becomes useless not because it broke, but because the world moved on."

What is Depreciation?

"Now here is the accounting part," Sharma Sir says. "We know that fixed assets lose value. Accounting must reflect this. We cannot show the truck at Rs 8,00,000 forever in our books when its real value is going down."

Depreciation = The process of gradually reducing the value of a fixed asset in the books over its useful life. It is an expense that is recorded every year.

"Think of it this way. Bisht Ji bought the truck for Rs 8,00,000. He will use it for about 10-15 years. The cost of the truck should be spread over all those years — not charged entirely in the year of purchase."

"Why not charge it all in Year 1?" Meera asks.

"Good question. If Bisht Ji charges the entire Rs 8,00,000 as an expense in Year 1, his profit will be very low that year — and very high in Year 2, 3, 4. That doesn't show the real picture. The truck is being used every year, so a portion of its cost should be an expense every year."

A simple analogy: Imagine you buy a big box of 365 incense sticks for a temple. You don't say, "I used all the incense on Day 1." You use one stick per day. Similarly, depreciation spreads the cost of an asset over the days, months, and years it is used.

Two Methods of Depreciation

"There are two main methods," Sharma Sir explains. "One is simple and even. The other is used by Indian tax law."

Method 1: Straight Line Method (SLM)

"In this method, you charge an equal amount of depreciation every year."

Formula:

Annual Depreciation = (Cost of Asset - Residual Value) / Useful Life in Years

Residual Value (also called scrap value) is what the asset might be worth at the very end of its life. For simplicity, it is often assumed to be zero or a small amount.

Example: Bisht Ji's truck costs Rs 8,00,000. Useful life = 10 years. Residual value = Rs 50,000.

Annual Depreciation = (8,00,000 - 50,000) / 10 = Rs 75,000 per year

"See? Same amount every year. Simple and easy to understand."

Method 2: Written Down Value (WDV) Method

"This is the method used by Indian Income Tax rules. In this method, you charge a fixed percentage of the remaining value each year."

Formula:

Annual Depreciation = WDV at start of year x Depreciation Rate

"The rate is fixed by the Income Tax Act for each type of asset."

Example: Same truck. Rs 8,00,000. Depreciation rate for motor vehicles under IT Act = 15%.

"Notice the difference? In WDV, the depreciation amount goes DOWN every year. Year 1 has the highest depreciation (Rs 1,20,000). Year 5 has less (Rs 62,641). This makes sense because a new asset loses more value in its early years."

Comparing the Two Methods

"In practice," Sharma Sir says, "you might use SLM for your financial statements (as per the Companies Act) and WDV for calculating tax (as per the Income Tax Act). Both are important."

"For our work in this office, we mostly use WDV because most of our clients are small businesses and proprietorships that focus on Income Tax calculations."

IT Act Depreciation Rates

Meera copies the important rates from Sharma Sir's reference chart:

"Computers depreciate at 40%!" Meera exclaims. "That's very fast."

"Yes. Because computers become outdated very quickly. A 3-year-old computer is practically ancient in today's world. The tax law recognizes this and allows a higher depreciation rate."

"Vehicles at 15% is more moderate — they last longer."

"And buildings at 5-10% — they last the longest."

Half-Year Rule

"There is one more rule to know," Sharma Sir says. "If an asset is purchased in the second half of the financial year (that is, after 30th September), only half the normal depreciation is allowed in that year."

"The financial year runs from April to March. If Bisht Ji bought the truck on 15th October — that is in the second half — first year depreciation would be:"

Half-year depreciation = Rs 1,20,000 / 2 = Rs 60,000

"But if he bought it on 15th June (first half), he gets the full Rs 1,20,000."

"This is important for tax planning," Negi Bhaiya adds. "If a client is thinking of buying a big asset in September or October, we sometimes advise them to buy it before 30th September to get full depreciation."

Meera Adds Bisht Ji's Truck in ERPLite

"Okay, let's do this in the software," Negi Bhaiya says.

Step 1: Set Up Asset Categories

1. Go to Masters > Asset Categories
2. Check if "Motor Vehicles" exists. If not, click + New Category

3. Click Save

"Let me also check the other categories," Meera says. She finds:

"Good — all set up."

Step 2: Add the New Asset

1. Go to Assets > Fixed Assets > + New Asset
2. Fill in the details:

3. ERPLite automatically picks up:

   • Depreciation Method: WDV
   • Depreciation Rate: 15%
   • Half-year rule applicable: Yes (purchased after 30th Sept)

4. Click Save

"The truck is now in Bisht Ji's books," Negi Bhaiya says.

Step 3: The Purchase Entry

When the asset is saved, ERPLite creates a journal entry:

"The truck is an asset, so it goes on the debit side. Money went out (or a payable was created), so Bank/Vendor is credited."

Calculating 3 Years of Depreciation

"Now let's calculate depreciation for 3 years," Sharma Sir says. "Meera, try this on paper first, then we'll check with ERPLite."

Year 1 (2025-26): Half-Year Rule Applies

The truck was bought on 15th October 2025 — in the second half of the financial year.

Year 2 (2026-27): Full Year

Year 3 (2027-28): Full Year

Summary Table

"So after 3 years, Bisht Ji's Rs 8,00,000 truck has a book value of Rs 5,34,650 in his accounts. That is a total depreciation of Rs 2,65,350."

Meera checks her calculations. They match. She smiles.

"Excellent work," Sharma Sir says. "Notice how the depreciation amount decreases each year? That is the nature of WDV — higher in the early years, lower later."

Running Depreciation in ERPLite

Step 4: Calculate Depreciation

1. Go to Assets > Calculate Depreciation
2. Select Financial Year: 2025-26
3. Click Calculate

ERPLite calculates depreciation for all assets:

4. Review and click Post Depreciation

Step 5: The Depreciation Journal Entry

ERPLite creates the following journal entry:

Meera studies the entry.

"Two new terms," she says. "Depreciation Expense and Accumulated Depreciation. What's the difference?"

Sharma Sir explains:

• Depreciation Expense = This year's depreciation. It goes in the Profit & Loss statement. It is an expense that reduces profit.
• Accumulated Depreciation = The TOTAL depreciation charged so far, over all the years. It sits in the Balance Sheet, as a negative against the asset.

"In the Balance Sheet, assets are shown like this:"

"The cost stays at Rs 8,00,000 forever — that is what was actually paid. But the accumulated depreciation increases every year, so the net book value goes down."

What Happens When an Asset is Sold?

"Sharma Sir, what if Bisht Ji sells the truck after 3 years?" Meera asks.

"Great question. When a fixed asset is sold, three things can happen."

Case 1: Sold for More than Book Value (Profit)

If the truck's book value is Rs 5,34,650 and Bisht Ji sells it for Rs 6,00,000:

Profit on sale = Rs 6,00,000 - Rs 5,34,650 = Rs 65,350

This profit is taxable.

Case 2: Sold for Less than Book Value (Loss)

If Bisht Ji sells it for Rs 4,50,000:

Loss on sale = Rs 5,34,650 - Rs 4,50,000 = Rs 84,650

This loss can reduce taxable income.

Case 3: Sold for Exactly Book Value

No profit, no loss. This rarely happens in real life.

"ERPLite handles this too," Negi Bhaiya says. "When you dispose of an asset, you enter the sale price and ERPLite calculates the profit or loss automatically."

Bisht Ji's Asset Register

"One last thing," Sharma Sir says. "Every business should maintain an Asset Register — a list of all fixed assets with their details."

ERPLite generates this automatically. Here is Bisht Ji's:

"This register is important for insurance, tax calculations, audits, and loan applications," Sharma Sir says.

Quick Recap — Chapter 25

Fixed Assets = Things a business owns and uses for more than 1 year (building, vehicle, computer, furniture). Not meant for sale.

Depreciation = Gradually reducing the value of a fixed asset in the books. Reflects wear and tear, ageing, and obsolescence.

Two Methods:

• Straight Line (SLM): Equal depreciation every year. Used in financial statements.
• Written Down Value (WDV): Percentage of remaining value. Higher depreciation in early years. Used for Income Tax.

Key IT Act Rates (WDV): Vehicles 15%, Computers 40%, Furniture 10%, Building 10%.

Half-Year Rule: If asset purchased after 30th September, only 50% depreciation in the first year.

Journal Entry: Depreciation Expense (Dr) and Accumulated Depreciation (Cr).

In ERPLite: Set up asset categories with rates, add assets, and calculate depreciation automatically.

Practice Exercise — Try This Yourself

Exercise 1: Classify the following as Fixed Asset or Current Asset:

Exercise 2: Calculate 3 years of depreciation using the WDV method:

• Asset: Computer
• Cost: Rs 60,000
• IT Act Rate: 40%
• Purchased: 10th July 2025 (first half — full depreciation in Year 1)

Fill in this table:

Exercise 3: Calculate 3 years of depreciation using the Straight Line method:

• Asset: Furniture
• Cost: Rs 1,00,000
• Useful life: 10 years
• Residual value: Rs 10,000

What is the annual depreciation? What is the book value after 3 years?

Answers:

Exercise 1: Fixed, Current, Current, Fixed, Fixed, Current.

Exercise 2:

Exercise 3: Annual Depreciation = (1,00,000 - 10,000) / 10 = Rs 9,000. After 3 years: 1,00,000 - (9,000 x 3) = Rs 73,000.

Fun Fact

Did you know that some famous buildings have been fully depreciated in the accounting books but are still worth crores? The Taj Mahal Hotel in Mumbai, built in 1903, would have been fully depreciated decades ago in the books. But its market value? Thousands of crores. This is the difference between book value (what the books say) and market value (what someone would pay for it).

And here is a fun thought: Bisht Ji's truck might have a book value of Rs 5,34,650 after three years, but if he has kept it in excellent condition and Uttarakhand's mountain roads have not been too rough on it, the actual selling price could be quite different. Depreciation is an accounting estimate, not an exact science. The real world is always a little different from the numbers in the books — and that is okay. The important thing is that the books reflect a fair and consistent picture.

In the next chapter, Meera will learn about bank accounts and payment batches — because in today's world, almost every payment goes through the bank. Cash is becoming old-fashioned, even in Haldwani.