Depreciation Accounting
Depreciation Accounting
This domain tests the meaning and causes of depreciation, straight line and written down value methods, and accounting treatment including asset disposal.
Core rules
- Depreciation allocates the depreciable cost of a fixed asset over its useful life; it is a charge against profit, not a valuation of the asset.
- Straight line method: (Cost - Scrap value) / Useful life.
- Written down value method: fixed percentage applied to the opening book value each year.
- Depreciation may be credited to the asset account or to a provision for depreciation account.
Worked example
A machine costs Rs.2,00,000, has scrap value Rs.20,000 and a life of 6 years. SLM depreciation = (Rs.2,00,000 - Rs.20,000) / 6 = Rs.30,000 per year. After two years, book value is Rs.2,00,000 - Rs.60,000 = Rs.1,40,000. Under WDV at 20%, year 1 depreciation is Rs.40,000 and book value Rs.1,60,000; year 2 depreciation is Rs.32,000 and book value Rs.1,28,000. WDV charges more in early years because the base falls each year.
Traps
Applying WDV rate to original cost; deducting scrap value every year under WDV; forgetting part-year depreciation on additions; and comparing sale proceeds with original cost instead of book value when computing profit or loss on sale.