Session 12 - Methods of Depreciation

Session Plan : Methods of Depreciation

1️⃣ 0–5 min: Introduce depreciation and why different methods are used.
2️⃣ 5–15 min: Explain Straight Line Method (SLM) with example and formula.
3️⃣ 15–25 min: Discuss Written Down Value (WDV) and Units of Production Method.
4️⃣ 25–35 min: Compare all methods with advantages and disadvantages.
5️⃣ 35–45 min: Summarize, clarify doubts, and review 5 key questions.

Lecture Material : (PDF, PPT)

Learning Material (IV Quadrant Approach)

(Q1) : Text and Image based Content (PDF/Image Formats)

Detailed Notes on “Methods of Depreciation”

1. Meaning of Depreciation

• Depreciation means the permanent, gradual decrease in the value of fixed assets due to usage, passage of time, or obsolescence.

• Methods of depreciation determine how much cost of the asset should be charged each year as an expense.

• Choice of method depends on nature of asset, usage pattern, and company policy.

2. Need for Different Methods

• To match expense with revenue accurately.

• To ensure fair asset valuation over its useful life.

• To comply with accounting standards (AS-10 / IAS-16).

• To suit the nature of the asset’s use (constant or declining).

3. Major Methods of Depreciation

(a) Straight Line Method (SLM)

• Also known as the Fixed Installment Method or Equal Amount Method.

• A constant amount of depreciation is charged every year over the useful life of the asset.

Example:
Cost = ₹1,00,000, Scrap Value = ₹10,000, Life = 9 years → Annual Depreciation = (₹1,00,000 – ₹10,000) ÷ 9 = ₹10,000 per year.

Advantages: Simple, easy to compute, equal charge each year.

Disadvantages: Ignores time value of money; asset efficiency decreases with age.

(b) Written Down Value Method (WDV)

• Also known as the Diminishing Balance Method.

• A fixed percentage rate of depreciation is charged every year on the book value (reducing balance).

Example:
Cost = ₹1,00,000, Rate = 10%

Year 1 Depreciation = ₹10,000 → Book Value ₹90,000

Year 2 Depreciation = ₹9,000 → Book Value ₹81,000

Advantages: Reflects actual loss of utility; suitable for machinery.
Disadvantages: Complex and gives uneven annual charges.

(c) Units of Production Method

• Depreciation is based on the usage or output of the asset rather than time.

• Suitable for assets where wear and tear depend on working hours or production units.

Example:
Cost = ₹1,00,000, Scrap = ₹10,000, Estimated Output = 90,000 units → Depreciation per unit = ₹1.

If output = 12,000 units → Depreciation = ₹12,000.

Advantages: Very accurate; matches expense with actual usage.
Disadvantages: Difficult to estimate total production in advance.

(d) Sum-of-the-Years’ Digits Method

• Accelerated method: higher depreciation in early years, lower in later years.

• Used for assets losing value faster initially.

Example:
Life = 5 years → Sum of Years = 15 (5+4+3+2+1).

Year 1: 5/15, Year 2: 4/15, etc.

Advantages: Realistic for assets that depreciate quickly.

Disadvantages: Complicated calculation.

4. Comparison Table

Method Basis Depreciation Amount Common Use

Straight Line Time Same each year Buildings, Furniture

Written Down Value Time Reducing amount Machinery, Vehicles

Units of Production Output Based on usage Plants, Mines

Sum of Years’ Digits Time Declining rate Equipment with quick wear

5. Effects of Method Selection

• Profit Impact: SLM shows equal expense; WDV shows higher early expense.

• Asset Value: Declines faster in WDV method.

• Tax Impact: Higher depreciation → Lower taxable profit initially.

6. Journal Entry for Depreciation

Depreciation A/c ........Dr

   To Asset A/c

(Being depreciation charged on asset)

• Profit & Loss Account: Expense side.

• Balance Sheet: Reduced asset value.

(Q2) : Video Based Content (Youtube)

(Q3) : Formative Assessment (Google Form/Any Other Online Quiz Platform)