Depreciation Accounting: Complete Guide for CA Students (SLM, WDV, Schedule II & Ind-AS 16)

Depreciation is the systematic allocation of the depreciable amount of a tangible asset over its useful life. It is not a process of valuation, but a process of cost allocation. For CA Foundation and Intermediate students, understanding the nuances between book depreciation (as per Companies Act/Ind-AS) and tax depreciation (as per Income Tax Act) is critical for mastering advanced topics like Deferred Tax.

In India, depreciation follows Ind-AS 16 (or AS 10) for financial reporting and Schedule II of the Companies Act, 2013 for useful lives, while tax depreciation is governed by the Income Tax Act (primarily Written Down Value method on blocks of assets).

Quick Answer for Featured Snippets:
Both Straight-Line Method (SLM) and Written Down Value (WDV) method allocate the same total depreciation (Cost – Residual Value) over the asset’s useful life. The difference lies in the timing — SLM spreads it evenly; WDV front-loads higher expense in early years.

What is Depreciation? Definition, Causes & Importance

Depreciation (as per Schedule II & Ind-AS 16):
"Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life."

Key Mathematical Components:

• Depreciable amount = $\text{Cost of asset} - \text{Residual (salvage) value}$
• Useful life = Period over which asset is expected to be available for use.

Main Causes:

• Physical wear and tear: Due to continuous use in production.
• Obsolescence: Arising from technological advancements.
• Effluxion of time: Passage of time.
• Depletion: Exhaustion of natural resources.

Why It Matters:

• Matches cost of asset with revenues (Matching Principle).
• Shows true & fair view of asset value on Balance Sheet.
• Impacts profit calculation and tax liability.

Non-depreciable assets: Land (generally appreciates), goodwill, inventories, financial assets.

Key Concepts & Terminology

• Cost of Asset: Purchase price + import duties + non-refundable taxes + directly attributable costs (Ind-AS 16).
• Residual / Salvage Value: Estimated amount recoverable at end of useful life (capped at 5% of original cost under Schedule II).
• Carrying Amount / Book Value: Cost less accumulated depreciation to date.
• Accumulated Depreciation: Contra-asset account showing total depreciation charged so far.

Overview of Depreciation Methods

Straight Line Method (SLM) – Detailed

Formula:
$\text{Annual Depreciation} = \frac{\text{Cost of Asset} - \text{Residual Value}}{\text{Useful Life (in years)}}$

Journal Entry:
Dr. Depreciation Expense A/c
Cr. Accumulated Depreciation A/c

Example:
Machine Cost: ₹5,00,000 | Residual: ₹50,000 | Life: 5 years
Annual Depreciation = $(5,00,000 - 50,000) / 5 = \mathbf{₹90,000}$

Written Down Value (WDV) Method – Detailed

Accelerated method – Higher depreciation in early years. This is the dominant method under Indian tax law.

How Rate is Determined under Schedule II:
$r = 1 - \left( \frac{\text{Residual Value}}{\text{Cost}} \right)^{\frac{1}{\text{Useful Life}}}$

Pros: Matches higher early productivity; better for assets losing value quickly (vehicles, computers).
Cons: Complex calculations; lower profits in early years.

Indian Regulatory Framework

1. Ind-AS 16 / AS 10

• Method must reflect pattern of consumption.
• Review useful life and residual value at least annually.
• Changes in estimates $\rightarrow$ prospective application.

2. Companies Act 2013 – Schedule II

• Prescribes useful lives for various assets.
• Residual value shall not exceed 5% of original cost.

3. Income Tax Act, 1961

• Uses Written Down Value method on block of assets.
• Creates temporary differences $\rightarrow$ Deferred Tax (Ind-AS 12).

Practice Questions

Q1. Define depreciation as per Schedule II of the Companies Act, 2013.
Ans: Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount is the cost of an asset less its residual value.

Q2. On 1st Oct 2024, XYZ Ltd. purchased a machine for ₹6,00,000. Residual value is ₹60,000 and life is 5 years. Calculate SLM depreciation for the year ended 31st March 2025.
Ans: Annual Dep = $(6,00,000 - 60,000) / 5 = 1,08,000$. For 6 months (Oct to Mar) = $1,08,000 \times 6/12 = \\mathbf{₹54,000}$.

Key Takeaways

• Depreciation is cost allocation, not valuation.
• SLM is constant; WDV is accelerated.
• Always check if the question asks for Schedule II (Books) or Income Tax Act (Tax) rules.
• Changes in estimates are always applied prospectively.