Depreciation Entry in Tally Prime and ERP 9 (with Examples) 2023

Depreciation Entry in Tally Prime and ERP 9 (with Examples) 2023-feature image
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Reviewed By: Sundresh Kumar  | 

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:

  1. Calculation of Depreciation: The Hard Part
  2. Passing Depreciation Journal Entry in Tally

Before we jump directly into the calculation and entry part. Let’s understand what depreciation is and why it is important in accounting

What Is Depreciation as per Accounting?

Depreciation Entry in Tally Prime and ERP 9  with Examples 2022

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.

Suggested Read: Difference between Tally ERP 9 Vs Tally Prime

Calculation of Depreciation

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.

Steps to Calculate Depreciation as per Straight Line Method (SLM)

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

  • Historical of Asset= Purchase cost + shipping, installation, and taxes

Estimate the useful life of the asset

  • Based on the Income Tax Act,1961 or Companies Act, 2013 

Estimate the salvage value of the asset

  • Not more than 5% (generally)
  • Based on the Income Tax Act,1961 or Companies Act, 2013

Calculate depreciation expense 

  • Depreciation expense = (Cost of the asset – Salvage value) / Useful life of the asset

Calculate depreciated book value

  • Book Value = Last recorded book value/ Purchase cost-depreciation expense

Creating a chart on Excel for Straight Line Method would look like this:

1B   F 
2AssetHistorical CostOpening Book ValueTotal Estimated LifeSalvage ValueDepreciationClosing Book Value
3Asset 1=(C3- F3)/E3=D3-G3
4Asset 2=(C4- F4)/E4=D4-G4
5Asset 3=(C5- F5)/E5=D5-G5
6Total=SUM(C3:C5) =SUM(D3:D5)=SUM(E3:E5)=SUM(F3:F5)=SUM(G3:G5)=SUM(H3:H5)

Example:

AssetHistorical CostOpening Book ValueTotal Estimated LifeSalvage ValueDepreciationClosing Book Value
Building₹5,000,000.00₹3,500,000.0020₹500,000.00₹225,000.00₹3,275,000.00
Furniture and Fixture₹2,500,000.00₹2,000,000.0010₹125,000.00237500₹1,762,500.00
Computers₹1,000,000.00₹400,000.005₹0.00200000₹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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Steps to Calculate Depreciation as per (Written Down Value) WDV or Declining Method

Now that we know what depreciation is, let’s move on to the steps of calculation.

Step 1: Determine the value of the asset

  • For existing: WDV in the previous year’s Balance sheet + Any Integral addition cost
  • For New Assets: Purchase cost + shipping, installation, and taxes

Step 2: Determine the rate of depreciation

  • Based on the Income Tax Act,1961 or Companies Act, 2013

Step 3: Calculate the depreciable value

  • Depreciation Expense= Net Value * Depreciation Rate

Step 4: Calculate the new written down value

  • New WDV = Old WDV/ Purchase Cost- Depreciation Expense

Creating chart on Excel for WDV or Declining Method would look like this

1ABCDEF
2AssetOpening Book ValueAdditionRateDepreciationClosing Book Value
3Asset 1=(C3+D3)*E3=C3-F3
4Asset 2=(C4+D4)*E4=C4-F4
5Asset 3=(C5+D5)*E5=C5-F5
6Total=SUM(C3:C5)=SUM(D3:D5)=SUM(F3:F5)=SUM(G3:G5)

Example:

1ABCDEF
2AssetOpening Book ValueAdditionRateDepreciationClosing Book Value
3Building₹5,000,000.00₹0.0010%₹500,000.00₹4,500,000.00
4Plant and Machinery₹2,000,000.00₹500,000.0015%₹375,000.00₹1,625,000.00
5Vehicle₹1,000,000.00₹0.0020%₹200,000.00₹800,000.00
6Total₹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.

Suggested Read: How to Create Performa Invoice in TallyPrime

Passing Depreciation Entry in Tally

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.

  1. Depreciation is a non-cash expense, which means errors of omission and calculation won’t be represented in the Trial Balance
  2. It’s an Adjustment entry, therefore it’s often passed at the end of financial year, i.e, 31st March
  3. A Depreciation Ledger must be created under the Expense Group
  4. The entry should debit the Asset Account and credit the Depreciation Account
  5. Depreciation entry in Tally Prime and ERP 9 must be passed through Journal Entry
  6. One single consolidated Journal entry could be passed to book depreciation for all assets.

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.

  1. Open ‘Gateway of Tally’
  2. Click on Accounts Info or Press “A”
  3. Go to Ledgers or Press “L”
  4. Select Create or Press “C”
  5. Type the name of the depreciation ledger
  6. Under the group, select Indirect Expenses
  7. Press Enter to save

The depreciation ledger is now created in Tally.

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:

  1. Open Gateway of Tally
  2. Click on Accounts Info or Press “A”
  3. Go to Ledger’s or Press “L”
  4. Select Create or Press “C”
  5. Type the name of the Asset
  6. Under the group, select Fixed Assets

(Enter the Opening balance if creating a new Account)

  1. Press Enter to Save
Press Enter to Save

Passing Depreciation Journal Entry in Tally Prime

  1. Go to Gateway of Tally
  2. Select Accounting Vouchers or press “V”
  3. Go to Journal Voucher by pressing F7
  4. Enter the date of the entry
  5. In the Debit Field Select the Depreciation ledger
  6. In the amount field enter the Total amount of depreciation (all Assets)
  7. In the Credit field select the Individual Asset account
  8. Enter the depreciation amount for the same asset
  9. Press enters
  10. Repeat 7 and 8 for the next asset
  11. Press enters to save the entry
The depreciation entry in Tally is now passed in the books of accounts

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.

AssetOpening ValueRateDepreciation
Building₹1,000,000.0010%₹100,000.00
Furniture and Fixture₹500,000.0015%₹75,000.00
Computers₹200,000.0030%₹60,000.00
Plant and Machinery₹3,000,000.0015%₹450,000.00
Automobile₹500,000.0020%₹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

  1. Depreciation comes under which account in Tally?

    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.

  2. Which depreciation method is used for tax purposes? 

    Income Tax Act, 1961 allows both Written Down Value/ Declining Value and Straight-line method of depreciation. 

  3. Where do we record depreciation in Tally?

    Depreciation is recorded through a journal voucher in the depreciation ledger, which is created under the expenses group.

  4. How to set depreciation rate in Tally?

    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.

  5. Is depreciation a credit or debit entry?

    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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