Depreciation Accounting: Methods, Accounting Treatment, Disposal of Asset and Change in Method Questions

Question 1

What is Straight Line Method (SLM) of depreciation?

Accepted Answer

**SLM** is a method in which **equal amount** of depreciation is charged every year over the useful life of the asset.

Question 2

Define depreciation.

Accepted Answer

**Depreciation** is the gradual and permanent decrease in the value of a **fixed asset** due to use, time, wear and tear or obsolescence.

Question 3

State any one cause of depreciation.

Accepted Answer

One cause of depreciation is **wear and tear** due to usage of the asset.

Question 4

What is Written Down Value (WDV) method?

Accepted Answer

**WDV** is a method in which depreciation is charged at a fixed rate on the **opening book value** of the asset every year.

Question 5

Depreciation is shown where in final accounts?

Accepted Answer

Depreciation is shown as an **expense in Profit & Loss A/c** and as a **deduction from the asset** in the Balance Sheet (or as accumulated depreciation).

Question 6

Differentiate depreciation and amortisation (one point).

Accepted Answer

**Depreciation** relates to tangible fixed assets, while **amortisation** relates to intangible assets.

Question 7

Explain the need/objectives of charging depreciation (any three points).

Accepted Answer

Need/objectives of charging depreciation (any three):

- follows **matching concept**: cost of asset use is matched with revenue of the period.
- shows **true profit** by charging depreciation as expense (otherwise profit is overstated).
- shows **true financial position** by not overstating fixed asset values.

Therefore, depreciation is essential for fair profit measurement and realistic balance sheet valuation.

Question 8

Explain causes of depreciation (any three) with a short table.

Accepted Answer

Causes of depreciation (any three):

- **wear and tear** due to usage.
- **passage of time** (even if not used).
- **obsolescence** due to new technology.

Table:

| Cause | Meaning |
|---|---|
| Wear & tear | physical usage reduces value |
| Time | aging reduces value |
| Obsolescence | new models make old asset less useful |

Hence, depreciation arises due to physical, time and technological factors.

Question 9

Explain SLM and WDV methods (any three points) and give one suitability for each.

Accepted Answer

### **SLM vs WDV (Brief)**

- **SLM** charges **equal** depreciation each year; suitable when asset gives **equal benefit** every year.
- **WDV** charges depreciation on **opening book value**; depreciation is **higher initially** and lower later; suitable for assets where repairs increase in later years.
- SLM base is **original cost**; WDV base is **written down value**.

Thus, method selection depends on asset usage pattern and management policy.

Question 10

Explain accounting treatment (journal entries) for depreciation (any three points) with a flow.

Accepted Answer

Accounting treatment (any three points):

- depreciation is first recorded by debiting **Depreciation A/c** and crediting **Asset A/c** or **Provision for Depreciation A/c**.
- depreciation is then transferred to **P&L A/c** as an expense.
- in balance sheet, asset is shown at **cost less accumulated depreciation** (or WDV).

Flow:

```text
Record depreciation → Transfer to P&L (expense) → Reduce asset / show accumulated depreciation in B/S
```

Hence, depreciation affects both profit and asset valuation.

Question 11

Explain depreciation vs depletion vs amortisation (any three points) with a small table.

Accepted Answer

### **Depreciation vs Depletion vs Amortisation**

- **Depreciation** is charged on tangible **fixed assets** (machinery, furniture) due to usage/time.
- **Depletion** relates to **natural resources** (mine, oil well) and reduces as resources are extracted.
- **Amortisation** relates to **intangible assets** (patents, copyrights) over useful life.

Table:

| Term | Applies to | Examples |
|---|---|---|
| Depreciation | tangible fixed assets | machinery, vehicle |
| Depletion | natural resources | mines, oil wells |
| Amortisation | intangible assets | patents, software |

Thus, all are allocation of cost over time, but for different asset types.

Question 12

Explain how depreciation affects profit and balance sheet (any three points) with a mini table.

Accepted Answer

Depreciation affects profit and financial position (any three points):

- depreciation is an **expense**, so it **reduces net profit** in Profit & Loss A/c.
- it reduces the **book value** of fixed assets in Balance Sheet (or increases accumulated depreciation).
- charging depreciation prevents **overstatement** of profit and assets, giving a true and fair view.

Mini table:

| Area | Effect |
|---|---|
| P&L A/c | profit decreases (expense) |
| Balance Sheet | fixed asset value decreases |

Hence, depreciation impacts both profitability and valuation.

Question 13

Explain SLM method with formula and a short worked example (exam-style).

Accepted Answer

### **Straight Line Method (SLM) — Exam-Style**

**Formula:**
- Annual Depreciation = (Cost − Scrap Value) / Useful Life

Worked example:
- Cost of machine = Rs. 1,00,000
- Scrap value = Rs. 10,000
- Life = 5 years

Depreciation per year:
- (1,00,000 − 10,000) / 5 = 90,000 / 5 = **Rs. 18,000**

Presentation:
- P&L A/c: Depreciation **Rs. 18,000** (expense)
- Balance Sheet: Machinery shown at **Cost − Accumulated depreciation**

**Conclusion:** SLM charges equal depreciation each year and is simple to apply.

Question 14

Explain WDV method with a short two-year working and table (exam-style).

Accepted Answer

### **Written Down Value (WDV) Method — Exam-Style**

WDV method charges depreciation on **opening book value** every year at a fixed rate.

Example:
- Cost = Rs. 1,00,000
- Rate = 20% p.a.

Working (2 years):

| Year | Opening BV (Rs.) | Depreciation @20% (Rs.) | Closing BV (Rs.) |
|---:|---:|---:|---:|
| 1 | 1,00,000 | 20,000 | 80,000 |
| 2 | 80,000 | 16,000 | 64,000 |

Presentation:
- P&L A/c: depreciation each year as expense.
- Balance Sheet: asset shown at **written down value**.

**Conclusion:** Under WDV, depreciation is higher in early years and decreases later.

Question 15

Differentiate SLM and WDV methods (exam-style) with a comparison table and any five points.

Accepted Answer

### **SLM vs WDV — Exam-Style (Any five points)**

| Basis | **SLM** | **WDV** |
|---|---|---|
| Depreciation amount | same each year | decreases each year |
| Base | original cost | opening book value |
| Profit impact | uniform | lower profit initially, higher later |
| Suitability | equal usage assets | assets with higher efficiency initially |
| Calculation | simple | comparatively more calculations |

**Conclusion:** SLM is simple and uniform; WDV matches better where benefits are higher in early years and repairs increase later.

Depreciation Accounting: Methods, Accounting Treatment, Disposal of Asset and Change in Method

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