Depreciation Entry in Tally – With Accumulated Depreciation Journal Entry

Depreciation Entry in Tally ERP 9

Depreciation entry in tally is one of the most easiest accounting entries in tally. You just need to know 2 things for that.

First is the amount of depreciation and the second one is the asset on which depreciation is to be taken.

When you know the answer to these two questions, you just need to pass a journal entry in tally for recording the depreciation.

Now, let’s see what we are going to learn today.

What you will learn in this post

  • What is depreciation & 2 different types of depreciation methods
  • Depreciation ledger creation in tally
  • How to pass depreciation journal entries in tally
  • Provision for depreciation in tally – Fully Explained
  • Understanding – Accumulated depreciation entry in tally

What is Depreciation & 2 Different Types of Depreciation Methods

Depreciation in simple words mean wear and tear to our asset.

For example, if we buy a mobile, after a year, it will not be as new as the first day. There might be some scratches, it might have slowed down a bit and may be some buttons will not work.

Mobile Phone - Depreciation Example in Tally
Mobile Phone – Depreciation Example in Tally

This is called physical wear and tear.

The market value of the mobile will also come down after a year because the new mobiles have been introduced. New software has been introduced as well.

Market value and new software are not directly connected to our mobile, but indirectly reduce the value of our mobile. The reason is because something better is now available.

This is called non-physical wear and tear.

Both the physical and non-physical wear and tear have reduced the value of our mobile, if we were to sell it in the market right now.

We have to account for this in tally to reflect the true value of our asset i.e. mobile phone.

And, that is my friend is called depreciation.

Different Types of Depreciation Methods – As per Income Tax Act

There are 2 different types of depreciation methods which are widely used. They are called as:

  1. Straight Line Method
  2. Written Down Value Method

I will explain both of them by simple examples.

Straight Line Method of Depreciation

For example, I bought a Samsung Note 10 for ₹90,000 today. I have an estimate that after 5 years, it will be of ₹20,000 only.

Samsung Note 10 - Depreciation Example
Samsung Note 10 – Depreciation Example

So, total depreciation for 5 years is ₹90,000 – ₹20,000 = ₹70,000.

Therefore, per year depreciation will be ₹70,000 / 5 = ₹14,000

Now, every year, I will account for the same ₹14,000 as depreciation on my Samsung Note 10.

This way of calculating depreciation is called straight line method because every year we allocate the same amount of depreciation to our asset.

Let’s change the example.

Written Down Value Method of Depreciation

I have bought an Apple Macbook for ₹2,00,000. I know that every year, its value will drop 20% of the previous value.

Apple Macbook - Depreciation Example in Tally
Apple Macbook – Depreciation Example in Tally

So, for the first year, ₹2,00,000 x 20% = ₹40,000 will be the depreciation and remaining value will be ₹2,00,000 – ₹40,000 = ₹1,60,000 at the end of the year.

Second year, we will calculate the depreciation on ₹1,60,000 @ 20% which will be ₹32,000. At the end of the 2nd year, value of Macbook will be ₹1,60,000 – ₹32,000 = ₹1,28,000.

Similarly, we will do this until we get a value which is equal to scrap or residual value in accounting terminology.

This is called written down value method for calculating the depreciation.

There are still a lot of other ways in which you can use these methods in practical life but this is a basic and simple way to use them.

We can also use a combination of these methods.

For simplicity, we will stick to straight line method of depreciation while learning depreciation entries in tally.

So, let’s start.

Depreciation Ledger Creation in Tally ERP 9

By now, you must have a fair idea of what depreciation is.

One of the basic understanding about depreciation is that it is not an actual expense. You are not paying cash out of your pocket for depreciation.

Instead, the value is getting reduced from the asset. Therefore, it is considered as a cashless expense.

It is an expense but without spending cash.

As it is an expense, we will create a depreciation ledger under Indirect Expenses in tally.

You can see here which ledger to select when in the list of ledger accounts in tally.

The reason is that it is not a direct expense. Direct expenses are much more directly related to the core business.

You can learn how to select which group under which ledger here to get absolute clarity.

  • Now, to create a depreciation ledger in tally, go to Gateway of Tally.
  • Then, select Accounts Info. and then ledgers.
  • Select Create under Single Ledger.
  • In the Name field – type Depreciation.
  • In the Under option – select Indirect Expenses.
  • Leave all of the other options to either No or Not Applicable.
  • Press Enter and save the ledger.
Creating Depreciation Ledger in Tally ERP 9
Creating Depreciation Ledger in Tally ERP 9

Congratulations! You have successfully created a depreciation ledger in tally.

Now, we will see how you can pass depreciation journal entry in tally just like another expense entry.

How to Pass Depreciation Journal Entries in Tally ERP 9

Have you noticed something in the heading above?

We are passing a journal entry for depreciation even though it is our expense. Generally, if we make a payment for something, we pass a payment entry in tally.

But in the case of depreciation, we are passing journal entry in tally?

Do you have any idea why? Think about it. I have already given the answer in this post.

If you don’t know the answer still, let me tell you. It is because depreciation is a cashless expense and therefore we are not paying anything.

We will just reduce the value of the asset. That’s the reason we are going to pass a depreciation journal entry and not the payment entry in tally.

For a depreciation entry in tally, we need fixed assets. We are going to continue with the same examples that we discussed above.

I will create two new ledgers in tally. One for Samsung Note 10 and another Apple Macbook.

You can easily learn how to create ledgers in tally in under 30 seconds here.

On the other hand, you can also select the ledgers of your fixed assets and then pass the depreciation entry against them.

Example – 1 – Straight Line Method Depreciation Entry in Tally

First, we will pass straight line method depreciation entry against the Samsung Note 10.

The value or the opening balance of Samsung Note 10 is ₹90,000. Residual or scrap value after 5 years is ₹20,000.

Therefore, after deducting the scrap value and dividing it by 5, current year depreciation as per the straight line method is ₹14,000.

We will pass the depreciation entry for ₹14,000 in tally against the Samsung Note 10.

Here are the steps for that:

  • From Gateway of Tally, go to Accounting Vouchers.
  • Then select Journal from the right hand side or press F7 – tally shortcut key for journal voucher in tally.
  • On the Debit side or By side, select the depreciation ledger. Enter the amount ₹14,000.
  • On the Credit side or To side, select the Samsung Note 10 ledger or the ledger of your fixed asset and press Enter.
  • You will see the value of Samsung Note 10 has been reduced to ₹76,000 in the current balance.
  • Press Enter and save the depreciation entry in tally.
Depreciation Journal Entry in Tally - Straight Line Method
Depreciation Journal Entry in Tally – Straight Line Method

Congratulations! You have successfully created a depreciation entry in tally using the journal voucher.

Now, if we look at the profit and loss account in tally, we will see the depreciation of ₹14,000 and all the other depreciations as well.

Depreciation Ledger in Profit and Loss Account in Tally
Depreciation Ledger in Profit and Loss Account in Tally

Let’s look at the balance sheet in tally as well and see how the ledger of Samsung Note 10 looks.

You can see the value of Samsung Note 10 to be ₹76,000.

Depreciation against Samsung Note 10 in Tally
Depreciation against Samsung Note 10 in Tally

Moving ahead with the second example of Apple Macbook using the Written Down Value Method of depreciation.

Example – 2 – Written Down Value Method Depreciation Entry in Tally

I have an Apple Macbook and I bought it for ₹2,00,000. It depreciates 20% every year. So, the depreciation entry for the first 5 years will be as under:

YearAsset Value (A)Depreciation @ 20% (B)Balance (A) - (B)
1₹2,00,000₹40,000₹1,60,000
2₹1,60,000₹32,000₹1,28,000
3₹1,28,000₹25,600₹1,02,400
4₹1,02,400₹20,480₹81,920
5₹81,920₹16,384₹65,536

And so on… Till I sell the Macbook or in other words, till you sell the asset.

The journal entry for depreciation under the written down value method is exactly the same as straight line method.

Method of calculating the depreciation has only changed. Method of passing the accounting entry in tally for depreciation is the same.

I want you to pass the above depreciation entries for 5 years in your tally and check that at the end of 5 years, whether you get the value of ₹65,536 or not.

You can download tally here, if you don’t have it right now on your computer.

Tell me in the comments, whether you got ₹65,536 at the end of five years or if you have any difficulties in doing so.

Now that you know the basics of depreciation and depreciation journal entries, we can move to some advanced topics regarding depreciation for learning.

Provision for Depreciation in Tally ERP 9

First of all, let me clear out that depreciation and provision for depreciation are entirely two different concepts.

Depreciation is what we saw in the beginning of the post i.e. usual wear and tear.

Provision for depreciation is a way to put aside some money for depreciation.

For example, you are saving money to buy a camera or a laptop. In accounting terminology, it is called provision for camera or laptop.

The provision literally means providing which means giving or putting aside something.

Provision for Depreciation in Tally ERP 9
Provision for Depreciation in Tally ERP 9

We provide depreciation so that we can smoothly account for depreciation when it actually comes or is required.

For another example, let’s say you are planning to buy a Canon DSLR. Right now, you don’t have it. But still, you are setting aside some money for depreciation on Canon DSLR.

Once you buy it, the depreciation will anyway have to be accounted and at that time, you will have sufficient provision for that.

Now, you must be thinking, what is the use of provision for depreciation? Why not direct depreciation as and when the asset comes?

What is the use of Provision for Depreciation

Provision for depreciation is used when there are multiple assets. Probably in hundreds or thousands in number.

Take for example, Tata Ltd. In a big company like this, there will be thousands of computers and other assets.

You have to provide for depreciation and have to be prepared when we have to actually debit the depreciation.

In big corporations like Tata, they estimate the amount of depreciation and provide for it. This amount might be less or more than the actuals and is adjusted accordingly.

Another key accounting advantage of having provision for depreciation account is that all the transactions related to depreciation will go through the provision for depreciation account.

This way, we can keep an eye if any fraudulent transactions are occuring in the name of depreciation.

Now, let us look at how the provision for depreciation works in tally with examples.

Provision for Depreciation Ledger in Tally ERP 9

Let us take another example for this so you can understand it better.

Example – 3 – Provision for Depreciation in Tally

We have 20 cars and 10 computers in our company. On an average, 2 cars and 4 computers have to be replaced each year.

The average value of above assets combined is ₹1.1 crores.

We provide for depreciation each year on the above assets at a rate of 10%. So, that will be ₹11,00,000 depreciation provision for one year.

We keep providing the same ₹11,00,000 depreciation every year whether the assets are less or more.

In the first year, the actual depreciation was ₹10,00,000 based on the assets we had. In the 2nd year, depreciation came to ₹12,00,000.

Now, we will pass the accounting entries for the above transactions in tally.

But before you pass the accounting entry for the above transactions, we will need a ledger named as Provision for Depreciation.

It will be under Provisions. Once you have created the ledger, follow the steps below.

Here are the steps for passing provision for depreciation entries in tally.

  • Firstly, go to Accounting Vouchers.
  • Select Journal Voucher or press F7.
  • On the Debit side, select the ledger of Depreciation A/c.
  • Enter ₹11,00,000 as the amount for provision.

On the Credit side, enter the Provision for Depreciation ledger. Provision is a form of a current liability.

Provision for Depreciation Entry in Tally
Provision for Depreciation Entry in Tally

Congratulations! You have successfully passed a provision for depreciation entry in tally.

If you look at the Balance Sheet now, you will see the amount of ₹11,00,000 in the Provisions under the Current Liabilities.

Provision for Depreciation in Balance Sheet in Tally
Provision for Depreciation in Balance Sheet in Tally

You can also see the amount of Depreciation in the Profit and Loss account.

Provision for Depreciation in Profit and Loss Account in Tally
Provision for Depreciation in Profit and Loss Account in Tally

Now, we will pass the actual depreciation entry of ₹10,00,000 against the provision of ₹11,00,000.

  • In the Journal Voucher, select Provision for Depreciation ledger. Enter ₹10,00,000 as that is the actual depreciation.
  • On the Credit side, select the ledger of your asset. I have selected Fixed Asset for this example.
  • Press Enter and save the accounting entry.
Provision for Depreciation used against Fixed Asstes in Tally
Provision for Depreciation used against Fixed Asstes in Tally

Did you notice the accounting trail in the above transactions?

We first moved ₹11,00,000 to Depreciation ledger and to Provision for Depreciation ledger. Then, we moved ₹10,00,000 from Provision for Depreciation against the Fixed Assets ledger.

So, finally, we have ₹1,00,000 as a balance in our Provision for Depreciation ledger or account.

In the next year, we will again make a provision for depreciation of ₹11,00,000 and actual depreciation will be ₹12,00,000.

Finally, the balance of Provision for Depreciation ledger will be zero.

I want you to pass the above depreciation entries in tally by yourself for the second year. If your balance for the Provision for Depreciation is zero, then you have done the entries correctly.

Now, that you have looked at provision for depreciation entries and different types of depreciation entries in tally, we can now understand accumulated depreciation in tally as well.

Accumulated Depreciation Entry in Tally ERP 9

Accumulated depreciation and provision for depreciation are different but the same concepts.

The word accumulation literally means to gather or store. In accounting, we store or gather depreciation for different purposes.

We saw that, we provide for depreciation because it is a regular expense and it is good to set aside some amount for that.

But, why do we accumulate the depreciation?

The Real Reason for Accumulating Depreciation

We accumulate the depreciation because we do not know about the future.

For example, let’s say, I have a petrol car. It’s value today is ₹50,00,000.

Accumulation of Depreciation - Example
Accumulation of Depreciation – Example

If we calculate the depreciation for 10 years after deducting the scrap value or resale value of ₹5,00,000 as per the straight line method, ₹4,50,000 will be the depreciation per year.

That is ₹50,00,0000 – ₹5,00,000 = ₹45,00,000 / 10 = ₹4,50,000.

Therefore the depreciation for 5 years together is ₹4,50,000 x 5 = ₹22,50,000.

After 5 years, the government announced a policy on electric vehicles which made the value of petrol vehicles drop.

Accumulated Depreciation in Tally ERP 9
Accumulated Depreciation in Tally ERP 9

So, at the end of 5 years, the dropped resale value of our petrol car is only ₹1,50,000.

But, we have calculated the depreciation taking ₹5,00,000 as the resale value.

So, now what to do?

This is one of the reasons, we create an accumulated depreciation ledger or account in tally.

We don’t know what will happen in the future and hence, we create a separate account to accumulate the depreciation.

And, when the time comes, we can change it.

So, now if we calculate the depreciation once again, after taking in the new resale value, it will be as under.

Car value today = ₹50,00,000 – ₹22,50,000 = ₹27,50,000.

Revision of depreciation from the beginning considering the new resale value.

₹50,00,000 – ₹1,50,000 = ₹48,50,000 / 10 = ₹4,85,000 per year is the new depreciation.

For 5 years it will be ₹4,85,000 x 5 = ₹24,25,000.

Depreciation for 5 years according to old resale value was ₹22,50,000.

Additional depreciation that we need to provide is ₹24,25,000 – ₹22,50,000 = ₹1,75,000.

Car value today after revised resale value = ₹27,50,000 – ₹1,75,000 (additional depreciation) = ₹25,75,000.

Now, we just need to pass a normal depreciation entry into the accumulated depreciation account or ledger in tally.

After that, we have to pass the depreciation entry in tally just like we did in the provision for depreciation entries.

The names are different but the meaning is the same.

If for some reason, the value of the asset increases, we have to remove the appropriate amount from the accumulated depreciation account to the asset’s account.

Often times, revaluation account is also used for these kinds of situations.

Depreciation Entry in Tally – Video

The video will be uploaded soon.

Depreciation Entry in Tally – PDF

The PDF will be uploaded soon.

Conclusion

Remember one thing that depreciation is nothing but normal wear and tear to a product.

It occurs whether you use the asset or not. A scooter even if not driven will take some wear and tear sitting in the garage.

There are many different ways of calculating depreciation in tally and accounting apart from the two methods we saw.

Some less used methods to calculate depreciation are units of production, sum of years digits.

Different methods are used because of different kinds of assets. Depreciation on a car will be different than depreciation on a manufacturing machine running 24 hours.

But, we have seen what generally is followed in depreciation entries in tally and accounting as well.

With these two methods, you can do most of the accounting in India easily.

Still, if you have any difficulties, please let me know in the comments below.

I will be happy to help you

Have any questions or doubts, comment it...