How to Use This Page
Solve each Samacheer Kalvi exercise question on your own first, then compare your method and answer. Depreciation Accounting is heavily numerical — practise the two methods (SLM and WDV) and their journal entries until you can compute them without hesitation.
Key Concepts (Quick Recap)
What is Depreciation?
Depreciation is the systematic allocation of the depreciable amount of a fixed asset over its estimated useful life.
Causes of Depreciation
1. Wear and tear from use 2. Passage of time (lease, patent, copyright) 3. Obsolescence — becoming outdated due to new technology 4. Depletion — reduction in quantity (mines, oil wells) 5. Accident — damage reducing value
Straight Line Method (SLM)
FormulaAnnual Depreciation = (Cost − Scrap Value) ÷ Useful Life
- Depreciation is fixed every year (same amount)
- Asset value reduces to scrap value at the end of useful life
- Rate of depreciation decreases over time (as it's a % of cost, but the fixed amount is a decreasing % of written-down value)
- Suitable for: furniture, leasehold property, patents
- Also called: Fixed Instalment Method, Original Cost Method
Written Down Value Method (WDV)
FormulaDepreciation = Rate × Written Down Value (at the beginning of the year)
- Depreciation decreases every year (same rate on decreasing balance)
- Asset value never reaches zero
- Rate of depreciation is fixed (but amount decreases)
- Suitable for: machinery, vehicles, plant and equipment
- Also called: Diminishing Balance Method, Reducing Balance Method
Comparison: SLM vs WDV
| Feature | SLM | WDV |
|---|
| Depreciation amount | Fixed every year | Decreases every year |
| Depreciation rate | Decreases over time | Fixed |
| Asset value | Reaches scrap value | Never reaches zero |
| Calculation base | Original cost | Written-down value |
| Suitable for | Lease, patent, furniture | Machinery, vehicles |
| Equal burden? | No (heavier in later years) | Yes (lighter in later years) |
Journal Entries for Depreciation
Under SLM:
Depreciation A/c Dr XXXX
To Asset A/c XXXX
(Being depreciation charged on asset)
Profit & Loss A/c Dr XXXX
To Depreciation A/c XXXX
(Being depreciation transferred to P&L A/c)
Under WDV: Same entries — only the amount changes each year (decreasing).
When asset is sold:
Cash/Bank A/c Dr XXXX (amount received)
Depreciation A/c Dr XXXX (depreciation for current year)
To Asset A/c XXXX (book value)
To Profit on Sale A/c XXXX (if sold at profit)
I. Choose the Best Answer (MCQs)
Q1. Under the Straight Line Method, depreciation amount is (a) Fixed every year (b) Decreasing every year (c) Increasing every year (d) Zero in the last year
Answer(a) Fixed every year — Under SLM, depreciation = (Cost − Scrap Value) ÷ Useful Life. This amount is the same every year.
Q2. Under the Written Down Value Method, depreciation is calculated on (a) Original cost (b) Scrap value (c) Written-down value (d) Market value
Answer(c) Written-down value — Under WDV, depreciation = Rate × Book value at the beginning of the year. The book value decreases each year, so the depreciation amount also decreases.
Q3. Depreciation is charged to (a) Trading Account (b) Profit & Loss Account (c) Balance Sheet (d) Manufacturing Account
Answer(b) Profit & Loss Account — Depreciation is an expense and is charged to the debit side of the Profit & Loss Account.
Q4. Under which method does the asset value become zero or reach scrap value? (a) Written Down Value Method (b) Straight Line Method (c) Both (a) and (b) (d) Neither
Answer(b) Straight Line Method — Under SLM, the asset value reduces by a fixed amount each year and reaches the scrap value (or zero) at the end of useful life. Under WDV, the asset value never reaches zero.
Q5. Obsolescence means (a) Wear and tear from use (b) Asset becoming outdated (c) Depletion of natural resources (d) Damage from accident
Answer(b) Asset becoming outdated — Obsolescence refers to an asset becoming obsolete or outdated due to technological changes, even though it may still be physically usable.
II. Fill in the Blanks
1. Depreciation is the systematic allocation of the depreciable amount over the useful life of an asset. 2. Under SLM, depreciation amount is fixed every year. 3. Under WDV, depreciation is calculated on the written-down value of the asset. 4. The estimated value of an asset at the end of its useful life is called scrap value or residual value. 5. Depreciation is charged to the Profit & Loss Account. 6. Under WDV, the asset value never reaches zero. 7. The two main methods of depreciation are Straight Line Method and Written Down Value Method. 8. Depreciation on leasehold property is best calculated using the Straight Line Method. 9. Under SLM, the rate of depreciation decreases over time (as the same amount is a decreasing percentage of the reducing balance). 10. Depletion is the cause of depreciation for natural resources like mines and oil wells.
III. True or False (with corrections for false statements)
Q1. Under SLM, depreciation amount decreases every year.
AnswerFalse — Correction: Under SLM, depreciation amount is FIXED every year. It is under WDV that depreciation amount decreases every year.
Q2. Under WDV, the asset value can become zero.
AnswerFalse — Correction: Under WDV, depreciation is calculated on the written-down value, which decreases each year but never reaches zero. The asset always has some residual book value.
Q3. Depreciation is a non-cash expense.
AnswerTrue — Depreciation does not involve any cash outflow. It is a notional expense charged to allocate the cost of the asset over its useful life.
Q4. Obsolescence is the same as wear and tear.
AnswerFalse — Correction: Wear and tear is physical deterioration from use. Obsolescence is the asset becoming outdated due to technological changes, even if it is physically intact.
Q5. Depreciation reduces the book value of the asset.
AnswerTrue — Each year, depreciation reduces the book value of the asset. Book value = Original cost − Accumulated depreciation.
IV. Match the Following
| Column A | Column B | Answer |
|---|
| 1. Straight Line Method | (a) Decreasing depreciation each year | (b) Fixed depreciation each year |
| 2. Written Down Value Method | (b) Fixed depreciation each year | (a) Decreasing depreciation each year |
| 3. Depreciation | (c) Charged to P&L Account | (c) Charged to P&L Account |
| 4. Scrap value | (d) Estimated value at end of life | (d) Estimated value at end of life |
| 5. Obsolescence | (e) Asset becoming outdated | (e) Asset becoming outdated |
V. Answer Briefly (2-mark questions)
Q1. Define depreciation. What are its causes?
Answer
Depreciation is the systematic reduction in the value of a fixed asset over its useful life due to wear and tear, passage of time, or obsolescence. Causes: (1) Wear and tear from use, (2) Passage of time, (3) Obsolescence (becoming outdated), (4) Depletion (for natural resources), (5) Accidents.
Q2. Distinguish between Straight Line Method and Written Down Value Method.
Answer
| Feature | SLM | WDV | |---|---|---| | Depreciation amount | Fixed | Decreasing | | Calculation base | Original cost | Written-down value | | Asset value | Reaches scrap value | Never reaches zero | | Suitable for | Lease, patent, furniture | Machinery, vehicles | | Impact on P&L | Equal burden each year | Higher burden in early years |
Q3. What is scrap value (residual value)?
Answer
Scrap value (residual value) is the estimated value of a fixed asset at the end of its useful life. It is the amount the business expects to receive when the asset is disposed of. In SLM: Depreciation = (Cost − Scrap Value) ÷ Useful Life.
Q4. Why is depreciation charged? Give two reasons.
Answer
1. To show true asset value: Without depreciation, the balance sheet would show assets at original cost, overstating their value. 2. To provide for replacement: Depreciation is charged to P&L each year, setting aside funds for replacing the asset when it becomes unusable.
Q5. What is obsolescence? How does it differ from wear and tear?
Answer
Obsolescence is when an asset becomes outdated or no longer useful due to technological changes, even though it may still be physically functional. - Wear and tear = Physical deterioration from use - Obsolescence = Functional deterioration from technology/market changes
VI. Answer in Detail (5-mark questions)
Q1. A machine was purchased on 1st April 2023 for ₹1,00,000. Its estimated life is 5 years and scrap value is ₹10,000. Calculate depreciation for each year under the Straight Line Method and prepare the Machinery Account.
Calculation
Annual Depreciation = (Cost − Scrap Value) ÷ Useful Life
= (1,00,000 − 10,000) ÷ 5
= 90,000 ÷ 5
= ₹18,000 per year
Machinery Account (SLM)
Date | Particulars | Amount | Date | Particulars | Amount
-----------|----------------------|--------|------------|--------------------|--------
Apr 1, '23 | To Bank A/c |1,00,000| Mar 31,'24 | By Depreciation | 18,000
| | | | By Balance c/d | 82,000
| |--------| | |--------
| |1,00,000| | |1,00,000
-----------|----------------------|--------|------------|--------------------|--------
Apr 1, '24 | To Balance b/d | 82,000 | Mar 31,'25 | By Depreciation | 18,000
| | | | By Balance c/d | 64,000
| |--------| | |--------
| | 82,000 | | | 82,000
-----------|----------------------|--------|------------|--------------------|--------
Apr 1, '25 | To Balance b/d | 64,000 | Mar 31,'26 | By Depreciation | 18,000
| | | | By Balance c/d | 46,000
| |--------| | |--------
| | 64,000 | | | 64,000
-----------|----------------------|--------|------------|--------------------|--------
Apr 1, '26 | To Balance b/d | 46,000 | Mar 31,'27 | By Depreciation | 18,000
| | | | By Balance c/d | 28,000
| |--------| | |--------
| | 46,000 | | | 46,000
-----------|----------------------|--------|------------|--------------------|--------
Apr 1, '27 | To Balance b/d | 28,000 | Mar 31,'28 | By Depreciation | 18,000
| | | | By Balance c/d | 10,000
| |--------| | |--------
| | 28,000 | | | 28,000
Note: Book value at end of Year 5 = ₹10,000 = Scrap Value ✓
Q2. Using the same data (Machine purchased for ₹1,00,000 on 1st April 2023, scrap value ₹10,000, life 5 years), calculate depreciation under the Written Down Value Method at 20% p.a. and show the Machinery Account.
Answer
Calculation (WDV @ 20%):
Year 1: Depreciation = 20% × 1,00,000 = ₹20,000; Book value = 1,00,000 − 20,000 = ₹80,000
Year 2: Depreciation = 20% × 80,000 = ₹16,000; Book value = 80,000 − 16,000 = ₹64,000
Year 3: Depreciation = 20% × 64,000 = ₹12,800; Book value = 64,000 − 12,800 = ₹51,200
Year 4: Depreciation = 20% × 51,200 = ₹10,240; Book value = 51,200 − 10,240 = ₹40,960
Year 5: Depreciation = 20% × 40,960 = ₹8,192; Book value = 40,960 − 8,192 = ₹32,768
Note: Under WDV, the asset value never reaches the scrap value of ₹10,000. This is a key difference from SLM.
Q3. Explain the causes of depreciation in detail.
Answer
1. Wear and Tear: Physical deterioration of the asset due to regular use. Machines wear out, buildings deteriorate, vehicles lose efficiency. The more an asset is used, the faster it depreciates. 2. Passage of Time: Some assets have a fixed legal life (lease, patent, copyright). Their value diminishes with time regardless of use. A lease for 10 years loses 1/10th of its value each year. 3. Obsolescence: An asset may become outdated due to technological advances or market changes, even if it is physically functional. Example: An old computer replaced by a faster model. 4. Depletion: Natural resources like mines, oil wells, and forests are gradually exhausted as they are extracted. The value decreases as the resource is used up. 5. Accidents: Damage from fire, flood, or other accidents can reduce the value of an asset permanently.
Common Mistakes to Avoid
- Forgetting to deduct scrap value in SLM: Depreciation = (Cost − Scrap Value) ÷ Useful Life. Always deduct scrap value before dividing.
- Confusing SLM and WDV formulas: SLM uses (Cost − Scrap) ÷ Life. WDV uses Rate × Written-Down Value. Don't mix them up.
- Using original cost every year in WDV: Under WDV, the depreciation base changes each year. Year 1 uses cost, Year 2 uses (cost − Year 1 depreciation), and so on.
- Thinking WDV reaches scrap value: Under WDV, the asset value NEVER reaches zero (or scrap value). This is a fundamental property of the method.
- Wrong journal entries: Depreciation is always Dr: Depreciation A/c, Cr: Asset A/c. Then Dr: P&L A/c, Cr: Depreciation A/c. Don't skip the second entry.
- Not updating book value for sale calculations: When selling an asset, calculate profit/loss as: Sale price − Book value (Original cost − Accumulated depreciation). Don't use original cost as the comparison base.
- Confusing obsolescence with wear and tear: Wear and tear is physical. Obsolescence is functional/technological. Both cause depreciation, but they are different causes.
Exam Checklist
- [ ] Can you define depreciation and list its causes?
- [ ] Can you calculate depreciation under SLM with scrap value?
- [ ] Can you calculate depreciation under WDV with a given rate?
- [ ] Can you prepare the Machinery/Asset Account under both methods?
- [ ] Can you distinguish between SLM and WDV (at least 5 points)?
- [ ] Can you pass journal entries for depreciation?
- [ ] Can you calculate profit or loss on sale of an asset?
- [ ] Can you handle asset purchased mid-year (pro-rata depreciation)?
- [ ] Can you explain why WDV never brings the asset value to zero?
- [ ] Can you identify which method is suitable for which type of asset?
