Depreciation
Methods and accounting treatment
Depreciation is the permanent, gradual and continuing reduction in the book value of a fixed asset due to use, wear and tear, obsolescence or passage of time. It is a non-cash expense. Under the straight-line method, annual depreciation = (Cost − Scrap value) ÷ Useful life. Under the written-down value method, depreciation is a fixed percentage of the opening book value each year. Record depreciation by debiting Depreciation A/c and crediting the asset A/c, or by using an Accumulated Depreciation A/c. Transfer Depreciation to Profit and Loss A/c.
Worked example
Machinery costs ₹1,00,000, scrap value is ₹10,000 and useful life is 5 years. Straight-line depreciation = (₹1,00,000 − ₹10,000) ÷ 5 = ₹18,000 per year. After three years, accumulated depreciation is ₹54,000 and book value is ₹46,000. Under WDV at 20%, first-year depreciation is ₹20,000 and second-year depreciation is 20% of ₹80,000 = ₹16,000. Reasoning: SLM uses a constant base; WDV uses the reducing book value.
Traps that cost marks
Do not treat depreciation as cash paid. Do not charge depreciation on land. For assets bought or sold during the year, calculate depreciation for the period held unless the question says a full year. In WDV, apply the rate to the opening book value, not the original cost every year. If a provision for depreciation account is used, do not credit the asset account directly.