DEPRECIATION

What is Depreciation?

Depreciation is the reduction in the value of assets due to wear and tear,
effluxion of time and obsolescence.

Every asset is subject to wear and tear in the ordinary course of its use and
with the effluxion or passage of time. Reduction in the value of asset may
also take place due to obsolescence. The cost of the asset is allocated over
time and considered as expense.

It is applied on long term assets which give benefits for many years. For
example, on Plant & Machinery, Vehicles, Computers, Furniture, Building
etc. Land is not subject to wear and tear and thus depreciation is not levied
on Land but applicable on a Building.

Considering depreciation as an expense is very much required for successful

financial management. For example, a driver gives his car for tourism
purpose, he must consider the fact that car has a limited useful life and he
needs to replace that after some years. For that, while calculating its
operation cost, he must consider the cost of car, its life, the resale value
after useful life and add it to other expenses for calculating total cost.

Depreciation is also allowed as an expense as per Income Tax Act and also
as per Companies Act.

Common Methods or Types of Depreciation

Straight Line Method (SLM)

In this method, equal amount of depreciation is charged on the asset over

its useful life. For Example – Asset is purchased for ₹1,00,000 and useful
life is 10 years with salvage value of Rs. 10,000 then depreciation is charged
at Rs. 9,000 for each of the 10 years. (1,00,000 – 10,000)/10 Years.

𝑪𝒐𝒔𝒕 𝒐𝒇 𝑨𝒔𝒔𝒆𝒕+𝑰𝒏𝒔𝒕𝒂𝒍𝒍𝒂𝒕𝒊𝒐𝒏 𝑪𝒉𝒂𝒓𝒈𝒆𝒔−𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝑺𝒄𝒓𝒂𝒑 𝑽𝒂𝒍𝒖𝒆

Formula= 𝑵𝒐. 𝒐𝒇 𝑼𝒔𝒆𝒇𝒖𝒍 𝒀𝒆𝒂𝒓𝒔 𝒐𝒇 𝑳𝒊𝒇𝒆

Written Down Value (WDV) Method

WDV method is the most commonly used method of depreciation. Also, in

Income Tax Act, depreciation is allowed as per WDV method only.

In this method depreciation is charged on the book value of asset and book
value is decreased each year by the depreciation. For e.g.- Asset is
purchased at ₹1,00,000 and depreciation rate is 10% then first year
depreciation is ₹10,000(10% of ₹1,00,000), second year depreciation is

Prof. Dr. (CA) Ameya Tanawade Page 1

₹9,000 (10% of 90,000 [1,00,000 – 10,000]) and third year depreciation is
₹8,100 ( 10% of ₹81,000 [90,000 – 9,000]).

This method is also called as Reducing Balance Method or Diminishing

Balance Method. In the WDV method, the amount of depreciation goes on
decreasing with time. An asset gives more value to a business in initial years
than later year, therefore, this method is considered as the most logical
method of depreciation.

There are also other methods of depreciation but they are not often used
such as Depreciation on the basis of Units of Production, Sum of years
Method, Sinking Fund Method etc.

Specimen Journal Entries

Sr.
Transaction Journal Entry
No.
1 Purchase of Asset Asset A/c………….……………………….…Dr.
To Cash/Bank A/C
2 Depreciation of Asset Depreciation A/c………….…………….….Dr.
To Asset A/C
3 Sale of Asset at Profit Cash/Bank A/c………………………….…Dr.
To Asset A/C
To Profit & Loss A/c
4 Sale of Asset at Loss Cash/Bank A/c…………………………….Dr.
Profit & Loss A/c…………………………..Dr.
To Asset A/C
5 Balance at the end of Profit & Loss A/c……………………….….Dr.
the year in Depreciation To Depreciation A/c
Account transferred to
Profit & Loss Account

Thus, depreciation is shown as an Indirect expense in the debit side of Profit

and Loss Account and Asset’s value is to be shown after the reduction of
depreciation in the balance sheet.

Difference between Depreciation amount under SLM & WDV

For e.g. Company purchases Machinery for ₹1,00,000/- having useful life of 10
years but not having scrap value and rate applicable for depreciation is 10%.
Calculate depreciation under SLM and WDV methods.

SLM (Depreciation Rate 10%) WDV (Depreciation Rate

10%)
At the end of Year
Book Depreciation Book Depreciation
Value Amount Value Amount
1 100000 10000 100000 10000
2 90000 10000 90000 9000
3 80000 10000 81000 8100
4 70000 10000 72900 7290
5 60000 10000 65610 6561

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 6 50000 10000 59049 5904.90
7 40000 10000 53144.10 5314.41
8 30000 10000 47829.69 4782.97
9 20000 10000 43046.72 4304.67
10 10000 10000 38742.05 3874.21

Benefits/Need of charging depreciation

1. Tax Benefit – Depreciation is allowed as an expense under Income Tax and

therefore it is important to consider it to save Income Tax.
2. Mandatory under Companies Act – It is compulsory to charge depreciation in
Profit and Loss account in Companies Act, 2013.
3. Real Profit – If it is not considered then expenditure on behalf of fixed assets
is not considered and the profit may be shown as a high number especially
in industries required large plant and machinery. Also, this may lead to high
distribution of earnings to shareholders and thus non-availability of funds
when business is in need to replace the asset.

Problems
Q1.
Turn hill Corporation a Limited company purchased Machinery worth ₹4,90,000 on
1st April 2012. They spent ₹10,000 on its installation. On 1st October 2012, they
Purchased another Machine costing ₹2,30,000 and spent ₹20,000 on its
installation. On 31st December 2014 they sold, the Machine purchased on 1 st
October 2012 for ₹1,90,000. On the same day they Purchased another Machine
costing ₹ 2,80,000 and paid ₹20,000 on installation of the same.
You are required to:
 Prepare Machinery Account for the FY 2012-13, 2013-14, 2014-15
charging Depreciation @ 10% on Straight Line Method Basis. Working
Notes will form a part of your answer.
Solution:
Working Note:
Particulars 1 2 3
2012-13
Purchased on 1/4/2012 500000
Purchased on 1/10/2012 250000
Less: Depreciation on 31/3/2013 50000 12500
WDV on 31/3/2013 450000 237500
2013-14
Less: Depreciation on 31/3/2014 50000 25000
WDV on 31/3/2014 400000 212500
2014-15
Less: Depreciation up to 31/12/2014 (9M) 18750
WDV as on 31/12/2014 193750
Less: Sold for 190000
Loss on Sale 3750
Purchased on 31/12/2014 300000
Less: Depreciation on 31/3/2015 50000 7500
WDV on 31/3/2015 350000 292500

Prof. Dr. (CA) Ameya Tanawade Page 3

Dr. Machinery A/c Cr.

Date Particulars Amt (₹) Date Particulars Amt (₹)

1/4/12 To Bank A/c 500000 31/3/13 By Depreciation A/c 62500
1/10/12 To Bank A/c 250000 31/3/13 By Balance C/d 687500
750000 750000
1/4/13 To Balance B/d 687500 31/3/14 By Depreciation A/c 75000
31/3/14 By Balance C/d 612500
687500 687500
1/4/14 To Balance B/d 612500 31/12/14 By Depreciation A/c 18750
31/12/14 To Bank A/c 300000 31/12/14 By Bank A/c 190000
31/12/14 By P & L A/c 3750
31/3/15 By Depreciation A/c 57500
31/3/15 By Balance C/d 642500
912500 912500

Q2.

Magnum Logistics Purchased 4 Motor Trucks worth ₹12,00,000 each for

their newly started Transport Business. These were purchased on 1st April,
2005. On 30th June 2006 they purchased 2 more trucks costing ₹12,50,000
each and expanded their fleet. On 1st October 2007, one of the trucks
Purchased on 1st April 2005, met with an accident and the insurance
company paid a claim of ₹9,00,000 against it.
The company replaced this truck with another truck costing ₹13,00,000 on
the same day.
You are required to:
 Prepare Motor Truck Account & Depreciation Account for the
years 2005-06, 2006-07, 2007-08, charging Depreciation @10%
on SLM basis. Working Notes shall form a part of your answer.

Solution:
Particulars 1 2 3 4 5 6 7
2005-06
Purchase on 1200000 1200000 1200000 1200000
1/4/2005
(-) Depn on 120000 120000 120000 120000
31/3/2006
WDV on 1080000 1080000 1080000 1080000
31/3/2006
2006-07
Purchase on - - - - 1250000 1250000
30/6/2006
(-) Depn on 120000 120000 120000 120000 93750 93750
31/3/2007
WDV on 960000 960000 960000 960000 1156250 1156250
31/3/2007
2007-08
(-) Depn on 60000
1/10/2007
WDV on 900000
1/10/2007
(-) Insurance 900000
Claim
Profit/Loss Nil

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Purchased on 1300000
1/10/2007
(-) Depn on - 120000 120000 120000 125000 125000 65000
31/3/2008
WDV on - 840000 840000 840000 1031250 1031250 1235000
31/3/2008

Dr. Truck A/c Cr.

Date Particulars Amt (₹) Date Particulars Amt (₹)
1/4/05 To Bank A/c 4800000 31/3/06 By Depn. A/c 480000
31/3/06 By Balance C/d 4320000
4800000 4800000
1/4/06 To Balance B/d 4320000 31/3/07 By Depn. A/c 667500
30/6/06 To Bank A/c 2500000 31/3/07 By Balance C/d 6152500
6820000 6820000
1/4/07 To Balance B/d 6152500 1/10/07 By Depn. A/c 60000
1/10/07 To Bank A/c 1300000 1/10/07 By Bank A/c 900000
31/3/08 By Depn. A/c 675000
31/3/08 By Balance C/d 5817500
7452500 7452500

Dr. Depreciation A/c Cr.

Date Particulars Amt (₹) Date Particulars Amt (₹)
31/3/06 To Truck A/c 480000 31/3/06 By P & L A/c 480000
480000 480000
31/3/07 To Truck A/c 667500 31/3/07 By P & L A/c 667500
667500 667500
1/10/07 To Truck A/c 60000
31/3/08 To Truck A/c 675000 31/3/08 By P & L A/c 735000
735000 735000

Q3.
Hilton India Limited purchased Machinery worth amount ₹19,00,000 on 1st
July 2009. They spent ₹1,00,000 on its installation. On 1st April 2010, they
Purchased another Machine costing ₹5,00,000 and spent ₹50,000 on its
installation. On 31st December 2011 they scrapped half the Machine
purchased on 1st July 2009 for ₹7,50,000 that was damaged due to fire
beyond repairs. However, on the same day they Purchased another Machine
costing ₹14,00,000 and paid ₹1,00,000 on installation of the same.
You are required to:
 Prepare Machinery Account for the 2009-10, 2010-11, 2011-12
charging Depreciation @ 10% on Reducing Balance Method Basis.
Working Notes will form a part of your answer.

Prof. Dr. (CA) Ameya Tanawade Page 5

Solution:
Working Note:
Particulars 1 2 3
50% 50%
2009-10
Purchased on 1/7/2009 1000000 1000000
Less: Depreciation on 31/3/2010 75000 75000
(9 Months)
WDV on 31/3/2010 925000 925000
2010-11
Purchased on 1/4/2010 550000
Less: Depreciation on 31/3/2011 92500 92500 55000
WDV on 31/3/2011 832500 832500 495000
2011-12
Less: Depreciation on 62438
31/12/2011 (9 Months)
WDV on 31/12/2011 770062
Less: Sale 750000
Loss 20062
Purchased on 31/12/2011 - 1500000
Less: Depreciation on 31/3/2012 - 83250 49500 37500
WDV on 31/3/2012 - 749250 445500 1462500

Dr. Machinery A/c Cr.

Date Particulars Amt (₹) Date Particulars Amt (₹)
1/7/2009 To Bank A/c 2000000 31/3/2010 By Depn. A/c 150000
31/3/2010 By Bal. C/d 1850000
2000000 2000000
1/4/2010 To Bal. B/d 1850000 31/3/2011 By Depn. A/c 240000
1/4/2010 To Bank A/c 550000 31/3/2011 By Bal. C/d 2160000
2400000 2400000
1/4/2011 To Bal. B/d 2160000 31/12/2011 By Depn. A/c 62438
31/12/2011 To Bank A/c 1500000 31/12/2011 By Bank A/c 750000
31/12/2011 By P & L A/c 20062
31/3/2012 By Depn. A/c 170250
31/3/2012 By Bal. C/d 2657250
3660000 3660000

Q4.

Excellent Ventures Limited is a Software manufacturer and distributor. The

company Purchased Fixed Assets worth ₹4,80,000 for its efficient working
and spent ₹20,000 on its installation on 1st October 2013. The company
acquired additional Fixed Assets valued at ₹3,50,000 and spent ₹10,000 on
its installation on January 01, 2014. On 1st April 2014 ¼th of the Assets
acquired on 1st October 2013 were damaged and had to be scrapped for
₹75,000. These assets were replaced by another lot of purchases worth
₹2,00,000.

Prof. Dr. (CA) Ameya Tanawade Page 6

Required:
 You are required to prepare, Fixed Assets Account & Depreciation
Account using DBM charging depreciation at 20% p.a. and
showing detailed working notes to substantiate your calculation
for a period of 2013-14 and 2014-15.

Solution:
Working Note:
Particulars 1 2 3
2013-14 ¼ ¾
Purchased on 1/10/2013 125000 375000
Purchased on 1/1/2014 360000
Less: Depreciation on 31/3/2014 12500 37500 18000
WDV on 31/3/2014 112500 337500 342000
2014-15
Less: Sale 75000
Loss on Sale 37500
Purchased on 1/4/2014 200000
Less: Depreciation on 31/3/2015 - 67500 68400 40000
WDV on 31/3/2015 - 270000 273600 160000

Dr. Fixed Assets A/c Cr.

Date Particulars Amt (₹) Date Particulars Amt (₹)
1/10/13 To Bank A/c 500000 31/3/14 By Depn. A/c 68000
1/1/14 To Bank A/c 360000 31/3/14 By Bal. C/d 792000
860000 860000
1/4/14 To Bal. B/d 792000 1/4/14 By Bank A/c 75000
1/4/14 To Bank A/c 200000 1/4/14 By P & L A/c 37500
31/3/15 By Depn. A/c 175900
31/3/15 By Bal. C/d 703600
992000 992000

Dr. Depreciation A/c Cr.

Date Particulars Amt (₹) Date Particulars Amt (₹)
31/3/14 To Fixed Asset A/c 68000 31/3/14 By P & L A/c 68000
68000 68000
31/3/15 To Fixed Asset A/c 175900 31/3/15 By P & L A/c 175900
175900 175900

Prof. Dr. (CA) Ameya Tanawade Page 7

Classwork Exercise:
Q5.

New look Foundry acquired a Blast Furnace costing ₹25,00,000 on 1st April
2010. On 1st July 2011, another Blast Furnace was acquired for ₹12,00,000.
On 31st December 2012 the furnace acquired on 1st July 2011 was sold for
₹10,50,000. On the same day company acquired another small furnace
costing ₹10,00,000.

Required to prepare:
 Blast Furnace Account
 Depreciation Account charging 10% Depreciation using DBM
 Show proper working notes

Solution:
Working Note:

Particulars 1 2 3
2010-11
Purchased on 1/4/2010 2500000
Less: Depreciation on 31/3/2011 250000
WDV on 31/3/2011 2250000
2011-12
Purchased on 1/7/2011 1200000
Less: Depreciation on 31/3/2012 225000 90000
WDV on 31/3/2012 2025000 1110000
2012-13
Less: Depreciation on 31/12/2012 83250
(9 Months)
WDV on 31/12/2012 1026750
Less: Sale 1050000
Profit on Sale 23250
Purchased on 31/12/2012 1000000
Less: Depreciation on 31/3/2013 202500 25000
WDV on 31/12/2013 1822500 975000

Prof. Dr. (CA) Ameya Tanawade Page 8

Dr. Furnace A/c Cr.
Date Particulars Amt (₹) Date Particulars Amt (₹)
1/4/10 To Bank A/c 2500000 31/3/11 By Depn. A/c 250000
31/3/11 By Bal. C/d 2250000
2500000 2500000
1/4/11 To Bal. B/d 2250000 31/3/12 By Depn. A/c 315000
1/7/11 To Bank A/c 1200000 31/3/12 By Bal. C/d 3135000
3450000 3450000
1/4/12 To Bal. B/d 3135000 31/12/12 By Depn. A/c 83250
31/12/12 To P & L A/c 23250 31/12/12 By Bank A/c 1050000
31/12/12 To Bank A/c 1000000 31/3/13 By Depn. A/c 227500
31/3/13 By Bal. C/d 2997500
4158250 4158250

Dr. Depreciation A/c Cr.

Date Particulars Amt (₹) Date Particulars Amt (₹)
31/3/11 To Furnace A/c 250000 31/3/11 By P & L A/c 250000
250000 250000
31/3/12 To Furnace A/c 315000 31/3/12 By P & L A/c 315000
315000 315000
31/12/12 To Furnace A/c 83250
31/3/13 To Furnace A/c 227500 31/3/13 By P & L A/c 310750
310750 310750

Journal Entry for Sale of Furnace

Date Particulars J/F Dr. (Rs.) Cr. (Rs.)

31/12/12 Bank A/c------------------------------Dr. 1050000
To Furnace A/c 1026750
To Profit & Loss A/c 23250
(Being Furnace purchased on
1/7/2011 sold at profit)

Prof. Dr. (CA) Ameya Tanawade Page 9