Depreciation accounting involves allocating the cost of a fixed asset over its useful life. Common methods for calculating depreciation include straight line, reducing balance, units of production and annuity. The cost basis for depreciation includes expenses for acquisition, installation and commissioning of the asset. Revaluation of assets, upward or downward, affects the depreciation calculation and associated accounting entries.

2. DEPRECIATION
ACCOUNTING
(AS-6)

3. decrease in the value or the expired portion of the cost
of fixed asset is called as “Depreciation”.
a process of allocating the cost of a fixed asset over its
estimated useful life in a rational and systematic
manner.
AICPA- “a system of accounting which aims to distribute the
cost or other basic value of tangible capital assets less salvage
(if any) over the estimated useful life of the unit (which may
be a group of assets) in a systematic and rational manner. It is
a process of allocation and not of valuation

4. expected to be used during more than one accounting
Depreciable period
have a limited useful life
held by an enterprise for Assets’ use in the production or supply
of goods and services for rental to others or for administrative
purposes and not for the purpose of sale in the ordinary
course of business.

5. Wear & Tear Time effluxion (Passage of time)
Obsolescence (Technological changes)
Depletion (Natural resources)

6. Calculating Net Profit/Loss Correct financial position
Funds for Replacement correct cost of production
Tax benefit Legal requirements.
( Companies & Income Tax Act)

7. Depreciation: a Non-Cash expense
a charge against profit
Depreciation : a Source of Fund for replacing the asset
Depreciation is calculated using the Cost of the fixed asset
(Market Value is ignored)

8. “Depreciation” is for Fixed Asset
“Amortization” is for Intangible & Fictitious assets
“Depletion” is for Natural Resources or Wasting
Assets.

9. Cost of asset including Capital expenses for installation,
commissioning, trial run etc.
Estimated useful life of the asset
Estimated scrap value (if any) at the end of useful life of the
asset
[Also called as Salvage Value, Residual Value, Terminal Value]
Note : The Cost of the asset Less Estimated Scrap Value is called
as “Depreciable Value” which is to be written off during the
useful life

10. Straight Line Method Written Down Value method
Annuity Method Sinking Fund Method
Sum of year’s digits method Machine hour method
Production units method

11. Also called as ““Fixed Instalment”, “Original Cost” Method
The depreciable value is written off over the useful life & reduced
to Nil.
An equal amount is charged as depreciation in P&L A/c.
Assumption : The usage/utility of the asset is equal in every
accounting period.

12. Depreciation Amount = Cost – Scrap Value
Useful Life
Depreciation rate = Depreciation Amount * 100
Cost of Asset
Applicable for assets that have insignificant repairs &
maintenances.

13. Also called as “Reducing Balance”, “Diminishing Balance” or
“Fluctuating Instalment” method
Annual depreciation decreases every year
The asset Reduced value never touches Zero
Depreciation rate =

14. Depreciation is high, when repairs are negligible.
As repair increases, Depreciation gets lesser.
Income Tax Act mandates WDV method
Part C of Schedule II (Companies Act, 13) specifies
depreciation rates (SLM/WDV)
Schedule XIV (Companies Act,1956)
First Year-Depreciation same (under SLM/WDV)
Subsequent years- Lesser Depreciation as per WDV

15. Variation of the “Reducing Balance Method”
Depreciable Value (Original Cost Less Scrap Value)
multiplied by
The number of years (including present year) of remaining life of the asset
Total of all digits of the life of the asset (in years)

16. This method includes the factor of interest on capital employed
Asset A/c – Dr.
To Interest A/c
Depreciation is charged on the asset’s original cost + the
interest(opportunity cost)
Depreciation is constant over the years (calculated using the annuity table)
Note : Depreciation – Debited to P&L A/c, Interest – Credited to P&L A/c
Generally used for long term leases which involves capital outflow.

17. For replacing the fixed asset at the end of its life, just accumulating
the depreciation is not enough
This annual depreciation (calculated using Sinking Fund table)
is transferred to a sinking fund account & a same amount
investment is done (government securities)
Every subsequent year the annual depreciation & the interest earned
is reinvested the Investment.
Last year of the old asset’s life, the securities are sold for replacing
the asset

18. The book value of the old asset, at the time, is transferred to the
Sinking Fund Account.
Amount realised on sale of the old asset, as well as the profit or
loss on sale of securities is transferred to the Sinking Fund
Account
Surplus of Sinking Fund A/c to General Reserve
Deficit to P&L A/c

19. Depreciation A/c Dr. Bank A/c Dr
To Sinking Fund A/c To Sinking Fund Investment A/c
Profit and Loss Account Dr. Sinking Fund Investment A/c Dr.
To Depreciation A/c To Sinking Fund A/c
(Reverse if loss)
Sinking Fund Investment A/c Dr. Sinking Fund A/c Dr
To Bank A/c To Asset A/c
Bank A/c Dr. Sinking Fund A/c Dr.
To Interest on Sinking Fund Investment A/c To General Reserve A/c
Interest on Sinking Fund Investment A/c Dr. P&L A/c Dr.
To Sinking Fund A/c To Sinking Fund Account
Note : Similarly “Insurance Policy method” is used, where annual depreciation is
deposited as annual premium, on maturity the assured sum is used for replacement of
asset.

20. Used by the Manufacturing industries
Depreciation depends mainly on the actual units/ output produced in
a particular year.
Depreciation: (Original Cost – Scrap Value) * Units produced in the year
Total Estimated output (Entire Life)

21. Used by the Manufacturing industries
Depreciation depends mainly on the actual machine hours used
in a particular year.
Depreciation: (Original Cost – Scrap Value) * Machine hours run in the year
Total Machine hours(Entire Life)

22. Used for mines, quarries etc
The depreciation rate is calculated by dividing the cost of
the asset by the estimated quantity of product likely to
be available.
Annual depreciation will be the quantity extracted multiplied by
the rate per unit.

23. Asset A/c Provision for Depreciation A/c
Also called as “ Accumulated Depreciation A/c”
Depreciation is charged from the Asset A/c itself
Depreciation A/c – Dr.
To Asset A/c
Depreciation is accumulated in a separate A/c
Depreciation A/c - Dr.
To Provision for Depreciation A/c

24. Only Asset A/c is prepared
The Purchase of Asset, Depreciation charged, Sale of asset,
its profit/loss & its closing balance (Book value/WDV)
are shown in the Asset A/c.
In the Balance Sheet, the asset is shown at the Net Book
Value (Gross Value – Depreciation)

25. The Asset A/c & “Provision for depreciation A/c” are separately
maintained
In the Asset A/c, the Purchase, Sale & its Profit/loss are recorded
( the account shows the Original cost of the asset)
The depreciation is accumulated in the separate “Accumulated
Depreciation” A/c
When the asset is sold, corresponding accumulated depreciation on it, is
to be closed.
Accumulated Depreciation A/c- Dr.
To Asset A/c

26. Asset Disposal A/c can be prepared for the asset which is being
disposed
Asset’s sale, its profit/loss are recorded
The opening balance of the asset (in the year of sale) is
transferred to “Asset Disposal A/c”
This A/c can be prepared with either of the method used for
depreciation

27. Profit or loss on sale of assets = Sale price of asset - Book
value/WDV of the asset on the date of sale
Book value of the asset on the date of sale = Original cost of the
asset – Total depreciation on the asset till that date
The profit/loss is transferred to P&L A/c
If asset is sold over Cost (Sales – Original Cost) – “Capital
Reserve”
Profit till Cost : P&L A/c

28. A firm purchased on 1st January, 2015 certain machinery for `
58,200 and spent ` 1,800 on its erection. On July 1, 2015 another
machinery for ` 20,000 was acquired. On 1st July, 2016 the
machinery purchased on 1st January, 2015 having become
obsolete was auctioned for ` 38,600 and on the same date fresh
machinery was purchased at a cost of ` 40,000. Depreciation was
provided for annually on 31st December at the rate of 10 per cent
p.a. on written down value. Prepare the necessary accounts.

29. As per Consistency concept , the Accounting policy should be
consistently applied.
Change is allowed when:
- Required by the Statute
- Required by Accounting Standard
- Change result in better true & fair view of financial statements
- Change in the depreciation method of the asset is applied
retrospectively.

30. Depreciation is to be compared under both the methods from the Date of
purchase
If the depreciation under old method is
> Depreciation under new method, then excess (surplus) depreciation is
taken back (Credited in P&LA/c)
If the depreciation under old method is
< Depreciation under new method, then short (deficit) depreciation is
charged(Debited in P&LA/c)
Prospectively (from date of change), the new method is applied
(to be applied on revised WDV- if new method is WDV)

31. A firm purchased on 1st January, 2014 certain machinery for ` 52,380 and spent `
1,620 on its erection. On January 1, 2014 another machinery for ` 19,000 was
acquired.
On 1st July, 2015 the machinery purchased on 1st January, 2014 having become
obsolete was auctioned for ` 28,600 and on the same date fresh machinery was
purchased at a cost of ` 40,000.
Depreciation was provided annually on 31st December at the rate of 10 per cent
on written down value. In 2016, however, the firm changed this method of
providing depreciation and adopted the method of providing 5 per cent per
annum depreciation on the original cost of the machinery with retrospective
effect.

32. a periodical review of useful life should be
done
In case of revision, WDV should be
depreciated over remaining life
(as per the revision)

33. As per AS-6, upward/downward revaluation of
asset may be done. (on the reduced balance)
Depreciation is charged on the revalued asset over
the remaining estimated useful life

34. In case Asset revalued upward, the revaluation profit credited to “Revaluation
Reserve A/c”
Asset A/c – Dr.
To Revaluation Reserve A/c
When subsequently revalued downward, Revaluation loss debited/charged from
“Revaluation Reserve” (to the extent available), otherwise from P&L A/c
Revaluation Reserve A/c – Dr
P&L A/c - Dr.
To Asset A/c
For downward revaluation for the first time, Revaluation loss charged to P&LA/c
P&L A/c – Dr.
To Asset A/c

35. An estimated expenditure is debited to Profit and Loss Account
and credited to Provision for Repairs and Renewals Account
P&LA/c – Dr.
To Prov. For Repairs A/c
The actual expenses are taken from the Provision A/c
Prov. for repairs A/c – Dr.
To Repairs A/c
Balance in Provision A/c is transferred to Asset A/c

36. Q.1. Original cost of a machine = Rs. 1,30,000, Salvage value =
Rs. 4,000, Useful life = 6 years, Depreciation for the 1st year
under sum of year's digit method will be :
Rs. 6,000
Rs. 12,000
Rs. 18,000
Rs. 36,000
D

37. Q.2. What would be treatment when plant and machinery is sold
for Rs. 1,40,000 whose cost is Rs. 1,00,000 and WDV is Rs.
40,000
Revenue receipt of Rs. 1,00,000
Capital receipt of Rs. 1,00,000
Capital profit of Rs. 40,000 and revenue profit of Rs. 60,000
Capital receipt of Rs. 40,000 and revenue receipt of Rs. 60,000
C

38. Q.3. A new machine costing ` 1 lakh was purchased by a company to manufacture a
special product. Its useful life is estimated to be 5 years and scrap value at ` 10,000. The
production plan for the next 5 years using the above machine is as follows:
Year 1 5,000 units
Year 2 10,000 units
Year 3 12,000 units
Year 4 20,000 units
Year 5 25,000 units
The depreciation expenditure for the 3rd year will be
` 6,250
` 12,500
` 15,000
` 25,000
C

39. Q.4. Method of depreciation - SLM; Rate of depreciation-20%
Year ending on 31st March every year. 1-04-04 Purchased
second hand machinery for Rs.80,000 1-04-04 Spent Rs.20,000
on its repairs Find out the profit or loss on sale of machinery if
machinery is sold on 30-09-2006 for Rs.45,000
Rs.5,000
Loss (Rs.15000)
Loss (Rs.5000)
Rs.15,000
C

40. Q.5. If depreciation is charged on an asset by Straight line
and Reducing balance methods, what will be the
respective amount of depreciation in subsequent years?
Equal in all years
Lower in the first year but equal in subsequent years
Equal in the first year but higher in subsequent years
Equal in the first year but lower in subsequent years
C

41. Q.6. Which method of charging considers that the business besides
losing the original cost of the asset also loses interest on the
amount used for buying the asset?
Annuity method
Insurance policy method
Diminishing Balance method
Depreciation fund method
A

42. Q.7. For charging depreciation, on which of the following
assets, the depletion method is adopted?
Plant & machinery
Land & building
Goodwill
Wasting assets
D

43. Q.8. The portion of the acquisition cost of the asset, yet to be
allocated is known as
Written down value
Accumulated value
Realizable value
Salvage value
A

44. Q.9. Which of the following expenses is not included in the
acquisition cost of a plant and equipment?
Cost of site preparation
Delivery and handling charges
Installation costs
Financing costs incurred subsequent to the period after plant and
equipment is put to use.
D

45. Q.10. In the case of downward revaluation of an asset which
is for first time revalued, the account to be debited is
Depreciation A/c
Revaluation Reserve
Profit & Loss A/c
Fixed Assets A/c
C