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

Depreciation is the systematic allocation of the depreciable amount of a tangible asset over its useful life. It reflects the reduction in value due to wear and tear, usage, obsolescence, or effluxion of time. For CA Foundation, Intermediate, and Final students, mastering depreciation is essential for Accounting papers, Advanced Accounting, and understanding deferred tax implications.

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."

Depreciable amount = Cost of asset – Residual (salvage) value.
Useful life = Period over which asset is expected to be available for use (or number of production units expected).

Main Causes:

• Physical wear and tear from usage
• Obsolescence (technological or market changes)
• Effluxion of time (e.g., leases, patents – though amortization for intangibles)
• Depletion (natural resources – separate treatment)

Why It Matters (Matching Principle & More):

• Matches cost of asset with revenues it helps generate (accrual basis)
• Shows true & fair view of asset value on Balance Sheet (Carrying Amount = Cost – Accumulated Depreciation)
• Impacts profit calculation, tax liability, and dividend decisions
• Helps in replacement planning and cash flow management
• Critical for CA exams: Numericals, journal entries, and differences between book vs tax depreciation (leading to Deferred Tax Liability/Asset)

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 to bring asset to location & condition for intended use (Ind-AS 16).
• Residual / Salvage Value: Estimated amount recoverable at end of useful life (capped at 5% of original cost under Schedule II unless justified otherwise).
• Carrying Amount / Book Value / Written Down Value (WDV): Cost less accumulated depreciation to date.
• Accumulated Depreciation: Contra-asset account showing total depreciation charged so far.
• Useful Life: Reviewed at least annually (Ind-AS 16). Can differ from Schedule II if justified with disclosure.

Overview of Depreciation Methods

Companies must choose a method that reflects the pattern in which the asset’s future economic benefits are expected to be consumed (Ind-AS 16). Common methods:

Key Insight (Quizlet-style exam point): SLM and Double Declining Balance (or WDV) produce the same total depreciation over the asset’s life but different annual amounts and book values each year.

Straight Line Method (SLM) – Detailed

Most common & simplest method. Equal depreciation expense every year.

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

Journal Entry (every year):
Dr. Depreciation Expense A/c
Cr. Accumulated Depreciation A/c

Example (CA-style, realistic numbers):
Plant & Machinery purchased on 1 April 2025:
Cost = ₹10,00,000
Residual Value = ₹50,000 (5%)
Useful Life = 5 years (illustrative; check Sch II for actual asset class)

Depreciable Amount = ₹9,50,000
Annual Depreciation (SLM) = ₹9,50,000 / 5 = ₹1,90,000

Depreciation Schedule (SLM):

Pros: Simple, easy budgeting & comparison, consistent P&L impact.
Cons: Does not reflect higher early-year usage/obsolescence.
When to use: Assets providing uniform benefits over time (e.g., factory buildings, furniture).
CA Exam Tip: Always show full schedule + journal entry. Partial year depreciation is prorated (e.g., asset bought on 1 Oct → 6/12 months).

Written Down Value (WDV) / Diminishing Balance Method – Detailed

Accelerated method – Higher depreciation in early years when asset is more productive or maintenance is lower. This is the dominant method under Indian tax law and commonly used for books too.

How Rate is Determined under Schedule II (India-specific):
The depreciation rate is calculated so that the asset reduces exactly to residual value at the end of useful life:

$\text{WDV Rate (r)} = 1 - \left( \frac{\text{Residual Value}}{\text{Cost}} \right)^{1 / \text{Useful Life}}$

Example (same asset): Cost ₹10,00,000, Residual ₹50,000, Life 5 years → r ≈ 45.07% (exact calculation).

Depreciation Schedule (WDV – exact rate applied, last year adjusted):

*Last year adjusted to reach exact residual. Figures rounded for presentation.

Journal Entry: Same form as SLM but with varying amounts each year.

Pros: Matches higher early productivity; tax benefits (higher early deduction); better for assets losing value quickly (vehicles, computers, certain plant).
Cons: Complex calculations; lower profits in early years.
CA Exam Tip: In Sch II problems, first derive or use given rate. For tax vs books, compute separately and find temporary difference.

Note on Double Declining Balance (DDB): Global accelerated method (2 × SL rate applied to opening BV, ignore salvage initially, adjust last year). In India, WDV rate is derived to hit residual exactly — conceptually similar but precisely calibrated per Schedule II.

Units of Production (Output) Method

Depreciation based on actual usage/output rather than time. Ideal when life is better measured in units produced or hours used.

Formula:
$\text{Depreciation per unit} = \frac{\text{Cost} - \text{Residual}}{\text{Estimated Total Units / Hours}}$
Period Depreciation = Depreciation per unit × Actual units/hours used

Example: Machine cost ₹10,00,000, residual ₹50,000, total estimated output 1,00,000 units. Year 1 produces 25,000 units.
Dep per unit = ₹9,50,000 / 1,00,000 = ₹9.50
Year 1 Dep = 25,000 × ₹9.50 = ₹2,37,500

Suitability: Manufacturing plants, vehicles with high variable usage. No depreciation when idle.

Sum-of-the-Years’-Digits (SYD) Method

Accelerated method using sum of digits of useful life.

Formula (n = useful life):
Sum of years = n(n+1)/2
Dep Year k = (n – k + 1) / Sum × (Cost – Residual)

Less common in current Indian practice but examinable in some contexts.

Indian Regulatory Framework – Must-Know for CA Exams

1. Ind-AS 16 / AS 10 (Property, Plant & Equipment)

• Depreciation method must reflect pattern of consumption of future economic benefits.
• Review useful life, residual value, and method at least annually.
• Changes in estimates → prospective application (no restatement of prior periods).
• Component accounting encouraged (depreciate significant parts separately, e.g., engine of aircraft/vehicle).
• Revaluation model allowed (fair value) – depreciation then on revalued amount.

2. Companies Act 2013 – Schedule II

• Prescribes useful lives for various assets (Part C) – e.g.:
  • Buildings (RCC): 60 years
  • Factory buildings: 30 years
  • Plant & Machinery (general): often 8–15 years depending on type
  • Motor cars: 8 years
  • Furniture & Fittings: 10 years
  • Computers: 3–6 years
• Residual value shall not exceed 5% of original cost (generally).
• Method: SLM or WDV (or other that reflects consumption pattern).
• If company uses different useful life → justify & disclose.
• Depreciation on historical cost (or revalued amount).

3. Income Tax Act, 1961

• Written Down Value method on block of assets (pooling concept) for most assessees.
• Prescribed rates (e.g., 15% for Plant & Machinery block, 10% for furniture, higher for certain assets).
• SLM allowed only for power generation/distribution undertakings.
• No concept of residual value in the same way; depreciation continues on block even if individual asset is sold (with adjustments).
• Major difference from books → creates temporary differences → Deferred Tax (Ind-AS 12 / AS 22). This is a high-weightage CA Inter topic.

Exam Gold: Always compute book depreciation (Sch II/Ind-AS) separately from tax depreciation and quantify the difference for DTL/DTA.

Comparison: SLM vs WDV – Impact Analysis

• Total Depreciation over life: Same (Cost – Residual).
• Pattern: SLM = constant expense & steady BV decline. WDV = front-loaded expense & rapid early BV decline.
• Profit Impact: WDV shows lower profits in early years (conservative).
• Tax Planning: WDV often preferred for cash flow (higher early tax shield).
• Balance Sheet: WDV shows lower asset values earlier.
• Suitability: Choose method that best reflects economic reality (Ind-AS 16 requirement).

Changes in Accounting Estimates & Policies

• Useful life or residual value change → prospective (recalculate remaining depreciable amount over remaining life).
• Method change → treated as change in accounting estimate (prospective) if it better reflects pattern.
• Full disclosure required in notes.

Example of Change: After 2 years, revise life from 5 to 8 years total → recalculate on remaining book value over new remaining life.

Revaluation of PPE & Depreciation

Under revaluation model (Ind-AS 16):

• Asset carried at fair value less subsequent depreciation.
• Depreciation calculated on revalued amount.
• Revaluation surplus transferred to retained earnings as asset is used (or on disposal).

Practice Questions

Test your understanding with these exam-style questions. Model answers are provided for self-assessment. These are designed to simulate CA Foundation/Intermediate written answer requirements (full-blown descriptive and numerical problems, not MCQs).

Short Form Questions (Conceptual & Numerical)

Q1. Define depreciation as per Schedule II of the Companies Act, 2013. Briefly explain any two causes of depreciation.

Model Answer:
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.

Two causes:

1. Wear and tear: Due to continuous use in production or operations, leading to physical deterioration.
2. Obsolescence: Arising from technological advancements or changes in market demand, making the asset economically inefficient even if physically usable.

Q2. "The total amount of depreciation charged on an asset over its useful life remains the same irrespective of the method of depreciation adopted." Do you agree? Give reason.

Model Answer:
Yes, I agree. Under any method (SLM, WDV, Units of Production, etc.), the asset is ultimately reduced to its estimated residual value. The depreciable amount (Cost – Residual) is fully allocated over the useful life. The methods only differ in the pattern or timing of allocation (even vs accelerated), not the total amount charged.

Q3. On 1st October 2024, XYZ Ltd. purchased a machine for ₹6,00,000. The estimated residual value is ₹60,000 and the useful life is 5 years. The company charges depreciation on Straight Line Method. Calculate the amount of depreciation to be charged in the books for the year ended 31st March 2025. Also, pass the necessary journal entry.

Model Answer:
Depreciable amount = ₹6,00,000 – ₹60,000 = ₹5,40,000
Annual depreciation (SLM) = ₹5,40,000 ÷ 5 = ₹1,08,000

Since the asset was acquired on 1st October 2024, it was used for 6 months in the financial year 2024-25.
Depreciation for the year = ₹1,08,000 × 6/12 = ₹54,000

Journal Entry:
Dr. Depreciation A/c ₹54,000
Cr. Accumulated Depreciation A/c ₹54,000
(Being depreciation charged on machine for 6 months @ SLM)

Q4. Distinguish between a 'change in accounting estimate' and a 'change in accounting policy' in the context of depreciation. How is each treated as per Ind-AS 8 / Ind-AS 16?

Model Answer:

• Change in Accounting Estimate (e.g., revising useful life or residual value): Applied prospectively. The carrying amount at the date of change is depreciated over the new remaining useful life. No restatement of prior periods.
• Change in Accounting Policy (e.g., switching from SLM to WDV method): Generally applied retrospectively (restating comparatives) unless impracticable. However, Ind-AS 16 treats a change in depreciation method as a change in estimate (prospective) because it reflects a change in the expected pattern of consumption of future economic benefits.

Q5. How is the depreciation rate determined when a company adopts the Written Down Value method as per Schedule II of the Companies Act, 2013? State the formula and explain its objective.

Model Answer:
The rate is determined using the following formula so that the asset's book value equals the residual value exactly at the end of its useful life:

$r = 1 - \left( \frac{\text{Residual Value}}{\text{Original Cost}} \right)^{\frac{1}{\text{Useful Life}}}$

Objective: To ensure systematic allocation that brings the carrying amount down to not more than 5% of original cost (residual cap) at the end of the prescribed or estimated useful life, maintaining consistency with the matching principle and true & fair view.

Q6. State any four disclosure requirements relating to depreciation as per Ind-AS 16.

Model Answer:

1. The depreciation methods used.
2. The useful lives or the depreciation rates used.
3. The gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period.
4. A reconciliation of the carrying amount at the beginning and end of the period showing additions, disposals, revaluations, depreciation charge, impairment losses, etc.

Case Studies (Comprehensive Scenarios with Full Solutions)

Case Study 1: Preparation of Depreciation Schedules under SLM and WDV – Impact Analysis

M/s Reliable Industries Ltd. purchased a new plant on 1st April 2024 for ₹20,00,000. The estimated residual value is ₹1,00,000 and the useful life is 5 years. The company follows Ind-AS 16 for financial reporting. Assume the company wants to compare methods for internal decision making.

Requirements:
(a) Prepare the depreciation schedule for 5 years under the Straight Line Method.
(b) Calculate the exact WDV depreciation rate as per Schedule II formula and prepare the full depreciation schedule under WDV method (adjust the depreciation in the last year to arrive at residual value precisely).
(c) Compare the depreciation expense and its effect on profit before tax for the first two years under both methods.
(d) Pass the journal entries for depreciation for the year 2024-25 under both methods.

Model Solution:

(a) SLM Schedule
Depreciable amount = ₹20,00,000 – ₹1,00,000 = ₹19,00,000
Annual Depreciation = ₹19,00,000 / 5 = ₹3,80,000

(b) WDV Rate & Schedule
Residual ratio = 1,00,000 / 20,00,000 = 0.05
WDV Rate (r) = 1 – (0.05)^(1/5) = 45.072% (approx 45.07%)

**Last year adjusted to reach exact residual value of ₹1,00,000.

(c) Comparison (First Two Years)

• Year 2024-25: SLM Dep = ₹3,80,000 | WDV Dep = ₹9,01,440 → WDV shows ₹5,21,440 higher expense → Lower Profit by same amount.
• Year 2025-26: SLM = ₹3,80,000 | WDV = ₹4,95,140 → WDV still higher by ₹1,15,140.
  Conclusion: WDV is more conservative in early years, better for tax planning if allowed, but shows lower profits initially. SLM provides stable expense for better comparability and budgeting.

(d) Journal Entries – Year 2024-25
Under SLM:
Dr. Depreciation Expense A/c 3,80,000
Cr. Accumulated Depreciation – Plant A/c 3,80,000

Under WDV:
Dr. Depreciation Expense A/c 9,01,440
Cr. Accumulated Depreciation – Plant A/c 9,01,440

Case Study 2: Units of Production Method with Change in Estimate (Prospective Application)

On 1st April 2024, TechForge Ltd. acquired a special-purpose machine for ₹15,00,000. Residual value estimated at ₹75,000. The machine is expected to produce 1,50,000 units over its useful life.

Actual production:

• Year 2024-25: 40,000 units
• Year 2025-26: 45,000 units

At the beginning of Year 2026-27 (i.e., 1st April 2026), due to faster technological obsolescence, the company revises:

• Total estimated production for the remaining life to 80,000 units.
• Revised residual value ₹50,000.

Requirements:
(a) Calculate and record depreciation for 2024-25 and 2025-26 under Units of Production method. Show carrying amount at 31.3.2026.
(b) Compute depreciation for 2026-27 onwards after revision (assume 30,000 units produced in 2026-27).
(c) Explain why the change is applied prospectively and its impact on financial statements.

Model Solution:
(a) Original UOP
Depreciable amount = 15,00,000 – 75,000 = ₹14,25,000
Depreciation per unit = 14,25,000 / 1,50,000 = ₹9.50 per unit

• 2024-25: 40,000 × 9.50 = ₹3,80,000
  Carrying amount at 31.3.2025 = 15,00,000 – 3,80,000 = ₹11,20,000

• 2025-26: 45,000 × 9.50 = ₹4,27,500
  Accumulated dep after 2 years = 3,80,000 + 4,27,500 = ₹8,07,500
  Carrying amount at 31.3.2026 = 15,00,000 – 8,07,500 = ₹6,92,500

(b) After Revision (Prospective from 1.4.2026)
Remaining depreciable amount at 1.4.2026 = Carrying amount – Revised residual = 6,92,500 – 50,000 = ₹6,42,500
Revised remaining units = 80,000
New dep per unit = 6,42,500 / 80,000 = ₹8.03125 per unit (approx ₹8.03)

For 2026-27 (30,000 units): Depreciation = 30,000 × 8.03 ≈ ₹2,40,937

Future years will use the new rate on actual production until revised again.

(c) Explanation:
As per Ind-AS 8 and Ind-AS 16, changes in estimates (useful life in units or residual value) are applied prospectively only. Prior periods are not restated. This ensures the financial statements reflect the best current estimate of future economic benefits consumption without disturbing historical comparability unnecessarily. The impact is that future depreciation charges (and profits) will be different from what would have been under old estimates.

Case Study 3: Book Depreciation vs Tax Depreciation and Deferred Tax Implications (CA Inter Level)

ABC Manufacturing Ltd. has a block of Plant & Machinery. As on 1.4.2024, the carrying amount as per books (Ind-AS) is ₹50,00,000 (after charging depreciation as per Schedule II – SLM method).

For Income Tax purposes, the Written Down Value of the block as on 1.4.2024 is ₹42,00,000. During the year 2024-25, the company purchased new machinery for ₹10,00,000 (eligible for tax dep). No disposals.

Depreciation for the year:

• Books (SLM as per Sch II): Total book depreciation charged = ₹7,50,000
• Tax: 15% WDV on the block (existing ₹42L + new ₹10L = ₹52L) = ₹7,80,000

Requirements:
(a) Compute depreciation as per books and as per Income Tax Act for 2024-25.
(b) Calculate the temporary difference and the amount of Deferred Tax Liability (DTL) to be recognized (assume corporate tax rate @ 25%).
(c) Pass the journal entry for deferred tax. Explain the nature of the difference.

Model Solution:

(a) Depreciation

• Books (Ind-AS / Sch II – SLM): ₹7,50,000
• Tax (IT Act – WDV @15%): ₹7,80,000

(b) Temporary Difference
Tax depreciation > Book depreciation by ₹30,000 (taxable temporary difference – higher deduction now will reverse later).

Deferred Tax Liability = ₹30,000 × 25% = ₹7,500

(c) Journal Entry
Dr. Deferred Tax Expense A/c ₹7,500
Cr. Deferred Tax Liability A/c ₹7,500
(Being creation of DTL on timing difference due to higher tax depreciation)

Nature: This is a taxable temporary difference arising from depreciation methods. It will reverse in future years when book depreciation exceeds tax depreciation (or on sale). Ind-AS 12 requires recognition of DTL for taxable temporary differences.

Case Study 4: Revaluation of Asset and Subsequent Depreciation

On 1st April 2023, PQR Ltd. purchased a building for ₹50,00,000. Useful life 20 years, residual value ₹5,00,000. SLM followed.

On 31st March 2025 (end of Year 2), the building is revalued to ₹55,00,000 (fair value). The remaining useful life is reassessed at 18 years from revaluation date with residual value now estimated at ₹4,00,000. The company uses the revaluation model.

Requirements:
(a) Calculate depreciation for 2023-24 and 2024-25 (pre-revaluation).
(b) Pass journal entries for revaluation on 31.3.2025.
(c) Calculate depreciation for the year 2025-26 after revaluation.
(d) Explain how the revaluation surplus is treated over the remaining life as per Ind-AS 16.

Model Solution:

(a) Pre-revaluation (SLM)
Depreciable amount = 50L – 5L = 45L
Annual dep = 45L / 20 = ₹2,25,000 per year

• 2023-24: ₹2,25,000 (full year)
  Carrying amount at 31.3.2024 = ₹47,75,000
• 2024-25: ₹2,25,000
  Carrying amount at 31.3.2025 (before reval) = ₹45,50,000

(b) Revaluation on 31.3.2025
Fair value = ₹55,00,000
Carrying amount before reval = ₹45,50,000
Revaluation Surplus = ₹9,50,000 (credited to OCI / Revaluation Surplus in Equity)

Journal Entry:
Dr. Building A/c ₹9,50,000
Cr. Revaluation Surplus A/c ₹9,50,000

(c) Depreciation 2025-26 (post reval)
New depreciable amount = 55L – 4L = ₹51,00,000
Remaining life = 18 years
Annual dep = 51L / 18 ≈ ₹2,83,333

(d) Treatment of Revaluation Surplus:
As per Ind-AS 16, the surplus may be transferred to Retained Earnings as the asset is used (in proportion to the difference between depreciation on revalued amount and depreciation on historical cost basis). It can also be transferred in full upon derecognition of the asset. This treatment prevents the surplus from being recognized as profit in P&L.

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Common Mistakes & CA Exam Tips

• Forgetting to cap residual at 5% or ignoring Sch II useful lives.
• Using tax rates for books or vice versa.
• Not adjusting last year in WDV/DDB to reach exact residual.
• Treating change in estimate as retrospective.
• Ignoring component accounting or multiple-shift implications (disclose if material).
• Practice Tip: Solve past ICAI RTPs/MTPs and mock tests on Kartavvya for topic-wise MCQs + analytics on weak areas like "WDV rate derivation" or "deferred tax on depreciation differences".

Sample MCQ (Exam Style):
The Straight-Line and Double Declining Balance methods produce:
A) Same depreciation expense every year
B) Same total depreciation over useful life
C) Same book value every year
Answer: B

Key Takeaways

• Depreciation allocates cost systematically — it is not valuation.
• Choose method per consumption pattern (Ind-AS 16).
• In India: Follow Sch II useful lives + 5% residual cap for companies; WDV dominant for tax.
• Total dep same across methods; timing & presentation differ.
• Master both book & tax computations for deferred tax questions.
• Always prepare full depreciation schedule + journal entries in exams.

Frequently Asked Questions (FAQs)

Q: What is the difference between SLM and WDV method?
A: SLM charges equal depreciation every year. WDV charges higher amount in early years on reducing balance. Total depreciation over life remains the same (Cost – Residual).

Q: How is depreciation rate calculated under Schedule II for WDV method?
A: Using the formula $r = 1 - (\text{Residual}/\text{Cost})^{1/\text{Useful Life}}$. The rate ensures the asset reaches residual value exactly at end of useful life.

Q: Do SLM and Double Declining Balance produce the same total depreciation?
A: Yes. Both methods (and WDV) allocate the same total depreciable amount (Cost minus Residual/Salvage) over the asset's useful life. Only the annual pattern differs.

(Additional FAQs can be expanded in production with more exam-style questions.)

References & Further Reading

• Ind-AS 16 – Property, Plant and Equipment (ICAI)
• Schedule II of the Companies Act, 2013 (useful lives table)
• ICAI Study Material / RTPs for CA Foundation & Intermediate Accounting
• Income Tax Act, 1961 – Depreciation provisions & Rules
• Principles of Accounting and Corporate Finance Institute resources (for global methods context)

Last Updated: July 2026 | Prepared by Kartavvya CA Expert Team (aligned with latest ICAI syllabus & Ind-AS)

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