Depreciation is the planned and gradual reduction in the value of a fixed asset over its useful life. Depreciation is applied to fixed assets like car, computers, machinery etc. as these assets lose their value as well as utility over the years.

Amortization works on the same principle as depreciation and is applied to intangible assets like patents, copyrights etc.

Suppose Navya buys a new car for Rs.6,00,000 at the start of the year for business use. If after using it for a year she attempts to sell the same at the end of the year, the resale value will definitely be below the purchase price of Rs.6,00,000. The resale value is the depreciated value of the car and the difference between the original purchase price and the resale price is the amount of depreciation. Even if Navya does not want to sell the car, she will reduce the value of the car each year in her books and mark the amount of reduction in her profit and loss statement as depreciation expense. Let’s assume that Navya marks Rs.60,000 each year as depreciation, the quarterly depreciation will be Rs.15,000.

While industrials, utility and insurance companies mark depreciation, banks usually have very few fixed assets and hence do not charge depreciation.