The importance of recording depreciation cannot be overstated. Depreciation is a critical element in business accounting, compliance, and tax calculations. Depreciation entries help businesses keep an accurate record of their assets, track the value of those assets over time, and claim tax deductions for the cost of those assets.
However, passing depreciation entry in Tally is a complex task. It involves calculating the depreciable value of an asset, charging it to the right account and valuing the assets correctly in the balance sheet. Besides, it must be compliant with the tax and other statutory laws.
This tutorial is divided into two major parts:
Before we jump directly into the calculation and entry part. Let’s understand what depreciation is and why it is important in accounting
The word depreciation is used to describe two different but related concepts in accounting: the decrease in value of an asset, and the allocation of the cost of an asset over its Useful Life.
The first concept, the decrease in value of an asset, is more commonly referred to as obsolescence or wear and tear. Obsolescence can be due to many factors, including changes in technology, fashion, or consumer preferences. Wear and tear are simply the results of normal use.
The second concept, the allocation of the cost of an asset over its useful life, is more commonly referred to as depreciation. Depreciation accounts for the cost of an asset over its useful life. The purpose of measuring the depreciation of an asset is to match the expense to the revenue that it generates.
Example:
If your business bought a transport lorry of ₹10,00,000 and it is expected to be useful for the next 10 years. Now the question is how to book the expense and at what value it should be represented in books of account at the end of the year.
If you deduct the whole amount in the first year itself, the profit will dip steeply even if the asset would be used for the next 9 years while
Now for better accounting, the total cost of a lorry, i.e., 10 lakhs, would be spread out over its useful life of 10 years.
Therefore, the company is supposed to book 1/10th of the total expense (₹1,00,000) for the next 10 years. At the end of the first year, the value of the lorry represented in the Balance sheet will be ₹9 lakh, at the end of the second year, it will be 8 lakh and so on.
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Tally doesn’t calculate depreciation; it just books the expense in your accounts. The accountant must calculate the amount of depreciation and then pass the entry in Tally.
The first thing you need to do is to choose a Method of Depreciation that best represents your financial statement and is allowed by statutory regulations
There are four methods of calculating depreciation: Straight Line Method, Declining Balance Method or Written Down Value (WDV), Sum of the Year’s Digits Method, and Usage or Units of Production Method. Among them, the Written Down Value or Declining Method is the most popular and widely acceptable method.
Moreover, in India, you must comply with the Companies Act, 2013 or Income Tax Act 1961 or both depending on the provisions. Both acts allow businesses to use either WDV or SLM method for correct representation.
The simplest method to calculate depreciation is the Straight-Line Method. As the name suggests, in this method, the amount of depreciation is spread evenly over the useful life of the asset.
To calculate depreciation using the straight-line method, you must take the following steps:
Determine the cost of the asset
Estimate the useful life of the asset
Estimate the salvage value of the asset
Calculate depreciation expense
Calculate depreciated book value
Creating a chart on Excel for Straight Line Method would look like this:
| 1 | A | B | C | D | E | F | G |
| 2 | Asset | Historical Cost | Opening Book Value | Total Estimated Life | Salvage Value | Depreciation | Closing Book Value |
| 3 | Asset 1 | =(C3- F3)/E3 | =D3-G3 | ||||
| 4 | Asset 2 | =(C4- F4)/E4 | =D4-G4 | ||||
| 5 | Asset 3 | =(C5- F5)/E5 | =D5-G5 | ||||
| 6 | Total | =SUM(C3:C5) | =SUM(D3:D5) | =SUM(E3:E5) | =SUM(F3:F5) | =SUM(G3:G5) | =SUM(H3:H5) |
Example:
| Asset | Historical Cost | Opening Book Value | Total Estimated Life | Salvage Value | Depreciation | Closing Book Value |
| Building | ₹5,000,000.00 | ₹3,500,000.00 | 20 | ₹500,000.00 | ₹225,000.00 | ₹3,275,000.00 |
| Furniture and Fixture | ₹2,500,000.00 | ₹2,000,000.00 | 10 | ₹125,000.00 | 237500 | ₹1,762,500.00 |
| Computers | ₹1,000,000.00 | ₹400,000.00 | 5 | ₹0.00 | 200000 | ₹200,000.00 |
| Total | ₹8,500,000.00 | ₹5,900,000.00 | ₹625,000.00 | ₹662,500.00 | ₹5,237,500.00 |
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Now that we know what depreciation is, let’s move on to the steps of calculation.
Step 1: Determine the value of the asset
Step 2: Determine the rate of depreciation
Step 3: Calculate the depreciable value
Step 4: Calculate the new written down value
Creating chart on Excel for WDV or Declining Method would look like this
| 1 | A | B | C | D | E | F |
| 2 | Asset | Opening Book Value | Addition | Rate | Depreciation | Closing Book Value |
| 3 | Asset 1 | – | – | – | =(C3+D3)*E3 | =C3-F3 |
| 4 | Asset 2 | – | – | – | =(C4+D4)*E4 | =C4-F4 |
| 5 | Asset 3 | – | – | – | =(C5+D5)*E5 | =C5-F5 |
| 6 | Total | =SUM(C3:C5) | =SUM(D3:D5) | =SUM(F3:F5) | =SUM(G3:G5) |
Example:
| 1 | A | B | C | D | E | F |
| 2 | Asset | Opening Book Value | Addition | Rate | Depreciation | Closing Book Value |
| 3 | Building | ₹5,000,000.00 | ₹0.00 | 10% | ₹500,000.00 | ₹4,500,000.00 |
| 4 | Plant and Machinery | ₹2,000,000.00 | ₹500,000.00 | 15% | ₹375,000.00 | ₹1,625,000.00 |
| 5 | Vehicle | ₹1,000,000.00 | ₹0.00 | 20% | ₹200,000.00 | ₹800,000.00 |
| 6 | Total | ₹8,000,000.00 | ₹500,000.00 | ₹1,075,000.00 | ₹6,925,000.00 |
You can calculate the total amount of depreciation to be charged in an Excel Sheet, before passing the depreciation entry in Tally Prime. This would help you to pass single adjustment entry to debit all the assets and record the entire depreciation at once in Tally.
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Now that we have calculated the amount of depreciation, it’s time to book the entry in Tally. Let’s understand a few things before passing on the entry.
Step 1: Create the Depreciation Ledger (if it doesn’t exist)
Note: If there is already a Depreciation Ledger, you can skip to Step 2
To book depreciation in Tally, you first need to create a depreciation ledger. Depreciation is considered as an indirect expense and therefore should fall under the expense group.
The depreciation ledger is now created in Tally.
Step 2: Create a New Asset Ledger
Note: You need to create an asset ledger either when a new asset is added to the list or when creating a new company account in Tally
Now that the depreciation ledger is ready, we can go ahead and create the ledger for the asset:
(Enter the Opening balance if creating a new Account)
Passing Depreciation Journal Entry in Tally Prime
The depreciation entry is now passed in the books of accounts.
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Depreciation Entry in Tally with Example
Here is an example of a depreciation chart made in Excel for a company. You need to pass out a single journal entry in Tally Prime for depreciation.
| Asset | Opening Value | Rate | Depreciation |
| Building | ₹1,000,000.00 | 10% | ₹100,000.00 |
| Furniture and Fixture | ₹500,000.00 | 15% | ₹75,000.00 |
| Computers | ₹200,000.00 | 30% | ₹60,000.00 |
| Plant and Machinery | ₹3,000,000.00 | 15% | ₹450,000.00 |
| Automobile | ₹500,000.00 | 20% | ₹100,000.00 |
| Total | ₹785,000.00 |
Tally Entry for Depreciation would be:
Dr. Depreciation A/c ₹785,000.00
Cr. Building A/c ₹100,000.00
Cr. Furniture and fixture A/c ₹75,000.00
Cr. Computers A/c ₹60,000.00
Cr. Plant and machinery A/c ₹450,000.00
Cr. Automobile A/c ₹100,000.00
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FAQ’s
Depreciation is the reduction of value of fixed assets because of normal wear and tear. It is considered as a noncash indirect expense and should therefore fall under the expense group in Tally.
Income Tax Act, 1961 allows both Written Down Value/ Declining Value and Straight-line method of depreciation.
Depreciation is recorded through journal voucher in the depreciation ledger, which is created under the expenses group.
You cannot set the depreciation rate and calculate depreciation in Tally. You can either calculate depreciation manually or use an excel sheet or asset management software for calculating depreciation rates and the depreciation value.
Depreciation entry is passed by crediting asset account and debiting depreciation expense account. Since it increases the expense, it could be considered a debit entry.
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