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📊 Depreciation vs. Appreciation: A Critical Framework for Asset Valuation and Financial Reporting in the Indian Context
Updated: July 25, 2025
Disclaimer: This article is for educational purposes only. The author is not a SEBI-registered advisor. No financial product is promoted or recommended. Kindly consult a qualified expert before acting on any financial matter.
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Most Indian businesses record depreciation annually, but ignore appreciation—even when land or assets rise in value. This article explains both concepts with Indian laws, examples, journal entries, and comparison charts. Learn how depreciation helps save tax, and when appreciation must be reported legally.
📚 Table of Contents
During a recent audit session, one of my junior accountants asked:
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“Sir, we enter depreciation every year, but why do we never credit appreciation in our books?”
This question sparked a deeper conversation. Many small business owners and accountants in India treat depreciation as routine, yet overlook the hidden potential of appreciating assets like land or gold. While depreciation is compulsory, appreciation is optional—but important.
🎯 What You'll Learn in This Article
- ✅ The meaning of depreciation and appreciation with examples
- ✅ How Indian tax and accounting laws treat both concepts
- ✅ Depreciation calculation methods (SLM, WDV, etc.)
- ✅ Journal entries for both depreciation and appreciation
- ✅ Charts and real-life examples for better clarity
📖 Scholarly Introduction: Reassessing the Dual Axes of Asset Valuation
During a recent audit session, a junior accountant posed a thought-provoking question:
“Sir, while we regularly document depreciation in our financial statements, why is there no corresponding recognition for appreciation?”
This simple yet profound inquiry highlights a crucial asymmetry in financial accounting—especially among small and medium Indian businesses. While depreciation is methodically recorded in books of accounts, appreciation—particularly of long-term assets such as land, heritage properties, or machinery upgrades—often goes unreported.
This article offers an in-depth examination of this disparity. It explores both depreciation and appreciation through regulatory lenses such as the Companies Act and the Income Tax Act, while addressing broader implications for asset management, compliance, valuation, and transparency.
📉 What is Depreciation?
Depreciation means a decrease in the value of a fixed asset over time. This happens due to regular use, wear and tear, age, or even technology becoming outdated. It is one of the most important concepts in business accounting.
For example, if a shop owner buys a machine for ₹2,00,000, it won’t have the same value after 5 years. Each year, it loses value. That loss is recorded as depreciation in the books.
Businesses record depreciation to:
- Show the true value of their assets on the balance sheet
- Match the asset’s cost with the revenue it generates over time
- Claim tax benefits as allowed under Income Tax rules
Depreciation is considered a non-cash expense. This means that while it reduces profit on paper, no actual money goes out of the business.
💼 Why Businesses Record Depreciation
Many small and medium business owners in India focus heavily on day-to-day cash flow, but often overlook how asset value is represented in their financial records. Depreciation helps bridge this gap. It provides a realistic picture of how much an asset is actually worth today, not just what it cost years ago.
Here’s why recording depreciation is essential:
- Compliance with Law: Under both the Companies Act and the Income Tax Act, businesses are required to record depreciation on assets. Ignoring this can lead to inaccurate financial reporting or penalties during assessments.
- Accurate Profit Calculation: If depreciation is not recorded, profits will be overstated. Depreciation brings down net income in a realistic way.
- Tax Benefits: In Income Tax returns, depreciation is allowed as a deduction. So by recording depreciation properly, businesses can reduce taxable income and save on taxes.
- Realistic Asset Valuation: Without depreciation, your balance sheet may show an inflated value of fixed assets like buildings, machinery, or furniture.
- Helps in Decision Making: Understanding how fast an asset loses value can help in planning asset replacements, budgeting, and investments.
Example: A small printing press in Belgaum bought a ₹5,00,000 offset machine in 2020. Without recording depreciation, the machine still shows full value in 2025. But in reality, its resale or working value has dropped to less than half. Depreciation makes this visible in financial reports.
🔧 Methods of Depreciation
Businesses can choose from different methods to calculate depreciation. The method depends on the nature of the asset and accounting standards they follow. In India, the two most common methods are:
1️⃣ Straight Line Method (SLM)
In this method, an equal amount of depreciation is charged every year over the asset's useful life.
Formula:
(Cost of Asset – Residual Value) ÷ Useful Life
Example: If a computer is purchased for ₹60,000 with a useful life of 5 years and scrap value ₹10,000, then:
Annual Depreciation = ₹(60,000 – 10,000) ÷ 5 = ₹10,000 every year
2️⃣ Written Down Value Method (WDV)
This method charges depreciation at a fixed percentage on the asset’s remaining book value each year. The amount reduces every year.
Formula:
Depreciation = Opening Book Value × Rate of Depreciation
Example: If machinery is bought for ₹1,00,000 with 20% WDV rate:
- Year 1: ₹1,00,000 × 20% = ₹20,000 → Book Value = ₹80,000
- Year 2: ₹80,000 × 20% = ₹16,000 → Book Value = ₹64,000
- Year 3: ₹64,000 × 20% = ₹12,800 → Book Value = ₹51,200
WDV is more common under the Income Tax Act, while SLM is used more often in Companies Act accounts.
⚖️ Depreciation under Companies Act vs Income Tax Act
Depreciation is mandatory under both the Companies Act, 2013 and the Income Tax Act, 1961. However, the rules and methods for calculating depreciation differ between the two laws.
📘 Companies Act, 2013
- Depreciation is calculated based on the useful life of assets, as given in Schedule II.
- Companies can choose either SLM or WDV method, but must disclose the method used.
- No fixed rates – instead, the focus is on the number of years an asset will be useful.
- More flexible and aligned with fair valuation and presentation standards (Ind AS/AS).
📗 Income Tax Act, 1961
- Depreciation is calculated based on fixed percentage rates as per the Income Tax Rules.
- Only the WDV method is allowed (SLM is not accepted).
- Assets are grouped into blocks of assets like Buildings, Plant & Machinery, Furniture, etc.
- Used mainly for tax deduction purposes – to reduce taxable profits.
Example: A laptop may be depreciated over 3 years under Companies Act (based on its useful life), while for Income Tax, it falls under a block with a fixed 40% WDV rate.
📊 SLM vs WDV: Depreciation Chart for 5 Assets
To clearly understand how the Straight Line Method (SLM) and Written Down Value Method (WDV) differ in depreciation calculation, here is a sample table showing depreciation for five common assets over 3 years:
| Asset | Purchase Value (₹) | SLM – Depreciation / Year (₹) | WDV – Year 1 (₹) | WDV – Year 2 (₹) | WDV – Year 3 (₹) |
|---|---|---|---|---|---|
| Computer | 60,000 | 10,000 | 24,000 | 14,400 | 8,640 |
| Furniture | 1,00,000 | 10,000 | 15,000 | 12,750 | 10,838 |
| Car | 5,00,000 | 83,333 | 80,000 | 64,000 | 51,200 |
| Building | 10,00,000 | 25,000 | 50,000 | 47,500 | 45,125 |
| Machinery | 2,00,000 | 20,000 | 30,000 | 24,000 | 19,200 |
Assumptions:
- SLM assumes fixed depreciation annually based on straight line.
- WDV assumes % rates as per IT Act: Computer – 40%, Furniture – 15%, Car – 20%, Building – 5%, Machinery – 15%
🧾 Journal Entries for Depreciation and Appreciation
Recording depreciation and appreciation correctly in accounting books ensures accurate financial statements and compliance. Below are standard journal entries followed in practice:
📉 Depreciation Entries
1. Direct Method:
Entry:
Depreciation A/c Dr. To Asset A/c
Effect: Reduces asset value directly.
2. Indirect Method (More Common):
Entry:
Depreciation A/c Dr. To Accumulated Depreciation A/c
Effect: Asset remains at historical cost; accumulated depreciation shown separately.
3. At Year-End:
Profit & Loss A/c Dr. To Depreciation A/c
Effect: Transfers depreciation to P&L account.
📈 Appreciation Entry (Theoretical / Exceptional Cases)
Although not generally allowed under Indian GAAP or the Income Tax Act, in certain fair valuation cases (such as under Ind AS), appreciation can be recorded like this:
Asset A/c Dr. To Revaluation Reserve A/c
Note: This entry is not applicable for tax purposes. It's for presentation in revaluation models adopted under Ind AS or IFRS.
📈 Understanding Appreciation
While depreciation reflects a decrease in asset value over time, appreciation refers to the increase in an asset's value due to external or internal factors. However, appreciation is often ignored in the traditional accounting books.
🔍 What is Appreciation?
Appreciation is the positive change in the market value of an asset over time. It may result from:
- Increase in market demand (e.g., urban land)
- Renovation or upgrades to the asset (e.g., machinery)
- Scarcity or inflation in replacement cost
- Foreign exchange effects on imported assets
📂 Types of Appreciation
- Unrealized Appreciation: Value increase shown in appraisal or reports, but not recorded in books.
- Book Appreciation: Used only when revaluation is formally adopted (e.g., Ind AS 16 – PPE Revaluation).
🧱 Real-Life Example:
Ramesh owns a commercial building in Hubli purchased in 2001 for ₹20 lakhs. In 2025, the property is valued at ₹1.2 crores. This ₹1 crore appreciation remains unrecorded unless Ramesh adopts revaluation accounting.
Thus, although appreciation is economically significant, it is generally not part of standard financial statements unless special valuation models are used.
🚫 Why Appreciation Is Not Recorded in Books
In traditional accounting systems, especially under Indian GAAP and Income Tax law, appreciation is not recorded in the books of accounts. Here’s why:
📜 1. Principle of Conservatism
Accounting follows the principle of prudence or conservatism, where only anticipated losses are accounted for, not expected gains. This ensures that the business does not overstate its profits or asset values.
🔐 2. Unrealized Nature
Appreciation is mostly unrealized – meaning the gain exists only on paper until the asset is sold. Since the asset hasn’t been sold, there's no actual cash inflow or confirmed profit.
🧾 3. Income Tax Act Restrictions
Under Indian tax laws, only realized gains are taxable. Recording appreciation before it’s realized can create compliance mismatches and unnecessary tax complications.
⚖️ 4. Regulatory Framework
Unless a company voluntarily follows Ind AS or IFRS (which permit revaluation models), traditional Indian accounting standards do not allow recognition of appreciation in regular accounts.
🧱 Example:
Let’s say a factory land worth ₹5 lakhs in 2005 is now worth ₹50 lakhs. Unless revalued and formally approved, the books will still show the land at ₹5 lakhs, with no journal entry for the ₹45 lakh appreciation.
📊 Depreciation vs Appreciation – Final Comparison
To summarise the key differences and clarify common doubts, here’s a comparison table between Depreciation and Appreciation:
| Criteria | Depreciation | Appreciation |
|---|---|---|
| Definition | Decrease in asset value over time | Increase in asset value over time |
| Nature | Negative (expense) | Positive (gain) |
| Accounting Entry | Recorded annually in books | Usually not recorded |
| Basis | Usage, time, obsolescence | Market conditions, improvements |
| Tax Impact | Allowed as expense under Income Tax Act | Not taxable until realized |
| Shown in Books | Yes, reduces asset value | No, unless revaluation model is adopted |
| Impact on Profit | Reduces profit | Increases profit (only when realized) |
What is the difference between depreciation and appreciation?
Depreciation means a decrease in the value of assets over time due to usage or obsolescence. Appreciation is an increase in the value of an asset, like land or gold, due to market factors. Depreciation is recorded in accounting books; appreciation usually is not unless revaluation is done.
How is depreciation calculated as per the Companies Act in India?
Under Schedule II of the Companies Act, 2013, depreciation is calculated using either the Straight Line Method (SLM) or Written Down Value Method (WDV), based on the useful life and residual value of the asset. Useful lives are predefined for different asset categories.
What are the different types of depreciation methods?
The most common depreciation methods are:
- Straight Line Method (SLM)
- Written Down Value Method (WDV)
- Units of Production Method
- Sum-of-the-Years' Digits Method
In India, SLM and WDV are most widely used under the Companies Act and Income Tax Act.
Why is appreciation not recorded in books of accounts?
Appreciation is not recorded because accounting follows the conservatism principle—only unrealized losses (like depreciation) are recorded, not unrealized gains. However, in some cases like revaluation of assets, appreciation can be shown under Revaluation Reserve in the balance sheet.
What is the journal entry for recording depreciation?
The standard journal entry for depreciation is:
Depreciation A/c Dr.
To Asset A/c
Alternatively, you may credit Accumulated Depreciation A/c instead of reducing the Asset account directly.
🌟 Final Thoughts: The Missing Balance in Accounting
In Indian business practice, depreciation is a well-known companion of compliance, but appreciation remains a silent guest. It’s not that appreciation doesn’t exist — it’s just not welcome in the formal books due to conservative principles and statutory limitations.
However, understanding both sides of the value equation helps business owners, accountants, and students develop a more rounded financial mindset. Recognizing that assets not only wear out but also appreciate silently gives clarity in real-world asset management.
Depreciation may save you tax today, but appreciation builds your long-term wealth story. Both are vital — one recorded, one realized later.
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