Asset Categories & Depreciation Methods

Depreciation is the systematic allocation of a fixed asset's cost over its useful life. It recognizes a simple reality: a CNC machine that costs Rs 10,00,000 today will not be worth Rs 10,00,000 five years from now. The machine wears out, technology advances, and the asset loses value. Accounting standards require businesses to reflect this decline in value through periodic depreciation charges. In Udyamo ERP Lite, the AssetCategory model governs how depreciation is calculated for groups of similar assets — defining the method, the useful life, and the rate. This chapter explains the two depreciation methods supported by the system, the Indian regulatory context, and walks you through creating asset categories step by step.

What You Will Learn

• What asset categories are and why they exist
• How the Straight Line Method (SLM) calculates depreciation
• How the Written Down Value (WDV) method calculates depreciation
• The Indian regulatory framework: Companies Act, 2013 Schedule II and Income Tax Act rates
• Common asset categories and their prescribed rates
• How to create and manage asset categories in Udyamo ERP Lite

Prerequisites

• Understanding of fixed asset concepts (covered in Chapter 43)
• Familiarity with the Udyamo ERP Lite dashboard (covered in Chapter 4)
• Basic understanding of accounting fundamentals (covered in Chapter 31)

What Are Asset Categories

An asset category is a grouping of similar fixed assets that share the same depreciation treatment. Instead of defining depreciation parameters individually for every machine, vehicle, or computer in your factory, you define them once at the category level, and every asset assigned to that category inherits the settings.

For example, you might create a category called "Plant & Machinery" with the Straight Line Method, a useful life of 15 years, and a depreciation rate of 6.33%. Every machine you add to this category — CNC lathe, hydraulic press, compressor — automatically uses these parameters for depreciation calculation.

This approach offers two key advantages:

1. Consistency. All assets of the same type are depreciated uniformly, as required by accounting standards.
2. Efficiency. You define the rules once. When you add the twentieth machine to your factory, you simply select the category rather than re-entering depreciation parameters.

Straight Line Method (SLM)

Under the Straight Line Method, an equal amount of depreciation is charged every year throughout the asset's useful life. The formula is:

Annual Depreciation = (Purchase Cost - Salvage Value) / Useful Life in Years

Worked Example: SLM

A manufacturing company purchases a lathe for Rs 10,00,000. The estimated salvage value at the end of its useful life is Rs 1,00,000. The useful life, as prescribed by Schedule II of the Companies Act, 2013 for general plant and machinery, is 15 years.

Annual Depreciation = (10,00,000 - 1,00,000) / 15 = Rs 60,000 per year

After 15 years, the book value equals the salvage value of Rs 1,00,000. No further depreciation is charged. The SLM is straightforward to understand, easy to calculate, and results in predictable, uniform charges to the Profit & Loss statement each year.

Tip: SLM is the method prescribed by Schedule II of the Companies Act, 2013 for computing depreciation under company law. If your business is a registered company, this is the method you will typically use for statutory financial statements.

Written Down Value Method (WDV)

Under the Written Down Value method, depreciation is calculated as a fixed percentage of the asset's current book value (not the original cost). Because the book value decreases each year, the depreciation amount also decreases year over year. The formula is:

Annual Depreciation = Depreciation Rate (%) x Book Value at the Beginning of the Year

Worked Example: WDV

The same lathe costs Rs 10,00,000. The depreciation rate under the Income Tax Act for plant and machinery is 15%.

Notice how the depreciation charge is highest in Year 1 and declines each subsequent year. The WDV method front-loads depreciation, reflecting the reality that most machinery loses value more rapidly in its early years.

Tip: The WDV method is prescribed by the Income Tax Act, 1961 for computing depreciation for tax purposes. Most Indian businesses maintain two depreciation schedules — one using SLM for Companies Act compliance and one using WDV for income tax. Udyamo ERP Lite lets you set up categories for either method.

Indian Regulatory Context

Indian businesses must comply with two distinct sets of depreciation rules:

Companies Act, 2013 — Schedule II. This schedule prescribes the useful life of assets by category. Companies compute depreciation using SLM based on these useful lives. The depreciation rate is derived from the useful life: Rate = (1 / Useful Life) x 100, adjusted for salvage value (which Schedule II caps at 5% of original cost unless the company justifies a higher amount).

Income Tax Act, 1961 — Section 32. The Income Tax Act prescribes depreciation rates for the WDV method. These rates are used to calculate depreciation for the purpose of computing taxable income. The IT Act rates are often more aggressive than Companies Act rates, resulting in higher depreciation deductions in the early years.

For manufacturing businesses, the key difference is this: the Companies Act determines what appears in your audited financial statements, while the Income Tax Act determines how much depreciation you claim in your tax return. The two figures may differ significantly, giving rise to what accountants call "deferred tax."

Warning: Do not confuse Companies Act depreciation with Income Tax depreciation. Using tax rates in your financial statements — or vice versa — will result in incorrect reporting. Discuss with your chartered accountant which method to use in the ERP for your primary books of account.

Common Asset Categories and Rates

The table below lists the most common fixed asset categories in manufacturing, along with the prescribed useful life (Companies Act, Schedule II) and WDV depreciation rates (Income Tax Act):

Tip: These rates are general guidelines. Specific assets may fall into different sub-categories with different rates. Always verify the applicable rate with your auditor, especially for specialized manufacturing equipment.

Creating an Asset Category — Step by Step

Follow these steps to create a new asset category in Udyamo ERP Lite:

Step 1: Navigate to Asset Categories. From the main menu, go to Assets > Asset Categories. This opens the asset category list view, showing all existing categories.

Step 2: Click "New Asset Category." Click the New button to open the asset category creation form.

Step 3: Enter the category details. Fill in the following fields:

Required: The Name and Depreciation Method fields are mandatory. You must provide at least one of Useful Life or Depreciation Rate depending on the method selected.

Step 4: Save the category. Click Save. The category now appears in the list and is available for selection when creating new assets.

Example: Setting Up Categories for a Small Factory

A typical small manufacturing unit might create the following categories to start:

1. Plant & Machinery — Depreciation Method: Straight Line, Useful Life: 15 years, Rate: 6.33%
2. Moulds & Dies — Depreciation Method: Straight Line, Useful Life: 8 years, Rate: 11.88%
3. Computers — Depreciation Method: Written Down Value, Rate: 40%
4. Furniture & Fixtures — Depreciation Method: Straight Line, Useful Life: 10 years, Rate: 9.50%
5. Vehicles — Depreciation Method: Written Down Value, Rate: 15%
6. Factory Building — Depreciation Method: Straight Line, Useful Life: 30 years, Rate: 3.17%

Tip: Set up your asset categories before you begin entering individual assets. This ensures every asset has a category assigned from the start, and depreciation parameters are consistent.

Asset Category Field Reference

Tips & Best Practices

Tip: If your business maintains both Companies Act and Income Tax depreciation schedules, create separate categories for each — for example, "Plant & Machinery (Companies Act)" and "Plant & Machinery (IT Act)." Discuss with your auditor which set to use as the primary in ERP.

Tip: Moulds and dies in manufacturing often have shorter useful lives than general machinery due to wear from repeated use. If your moulds are replaced every 4-5 years in practice, consult your auditor about justifying a shorter useful life than the default 8 years prescribed by Schedule II.

Tip: Review your asset categories annually. If your business adds new types of assets — say, you invest in solar panels or 3D printers — create appropriate categories before entering the assets. Do not force-fit assets into incorrect categories just because a suitable one does not exist yet.

Warning: Once depreciation entries have been created for assets in a category, changing the depreciation method or rate on the category will not retroactively recalculate past depreciation. Any changes apply prospectively. Always verify parameters before starting depreciation runs.

Quick Reference