Q.M/s Digital Studio bought a machine for ₹8,00,000 on April 01, 2013. Depreciation was provided on straight-line basis at the rate of 20% on original cost. On April 01, 2015 a substantial modification was made in the machine to make it more efficient at a cost of ₹80,000. This amount is to be depreciated @ 20% on straight line basis. Routine maintenance expenses during the year 2013-14 were ₹2,000. Draw up the Machine account, Provision for depreciation account and charge to profit and loss account in respect of the accounting year ended on March 31, 2016.
Concept understanding — Depreciation Accounting
Depreciation Accounting — A First Look
Think about a new smartphone you buy for ₹50,000. After two years, if you try to sell it, you'll be lucky to get ₹20,000. The phone hasn't changed physically — it still works, it still makes calls — but its value has fallen. That fall in value is depreciation.
Now scale that up. A business buys a delivery van for ₹8,00,000. The van will be used for five years. At the end of five years, it might be sold as scrap for ₹50,000. The business knows, right from day one, that the van is losing value every year it is used. Depreciation accounting is simply the systematic way of recording that loss of value each year.
The precise meaning
Depreciation is the permanent, continuous, and gradual reduction in the book value of a fixed asset. It applies to tangible fixed assets — machinery, buildings, furniture, vehicles, computers — that have a useful life of more than one accounting period. Land is the major exception: land does not depreciate (unless it is a mine or quarry).
Three things cause depreciation:
- Wear and tear from use (a machine running 16 hours a day wears out faster)
- Passage of time even if unused (a car parked in a garage still loses value)
- Obsolescence (a computer becomes outdated long before it physically breaks)
Why does it matter?
If a business does not record depreciation, its profit will be overstated. Imagine a transport company that earns ₹10,00,000 in a year and spends ₹6,00,000 on fuel, salaries, and repairs. If it ignores the fact that its buses lost ₹2,00,000 in value, it will report a profit of ₹4,00,000. But the true profit — after accounting for the wearing out of buses — is only ₹2,00,000. The business is actually poorer than it looks.
Depreciation also ensures that the asset's cost is spread over the years it helps generate revenue. This is the matching principle in action: expenses should be recorded in the same period as the revenue they help earn.
The accounting treatment
There are two accounts involved in every depreciation entry:
- Depreciation Account — an expense account (nominal account)
- Asset Account — the fixed asset account (real account)
The journal entry is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Depreciation A/c ……… Dr. | xxx | |||
| To Asset A/c | xxx | |||
| (Being depreciation charged on asset) |
Why this entry? Depreciation is an expense, so we debit the Depreciation Account (increase in expense). The asset's value is falling, so we credit the Asset Account (decrease in asset).
At the end of the year, the Depreciation Account is closed by transferring it to the Profit & Loss Account:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Profit & Loss A/c ……… Dr. | xxx | |||
| To Depreciation A/c | xxx | |||
| (Being depreciation transferred to P&L) |
The Asset Account now shows a reduced balance — this is called the book value or written down value of the asset.
Depreciation is not a cash expense. No money leaves the business when depreciation is recorded. It is a non-cash charge that reduces profit but does not affect cash flow.
The two main methods
Straight Line Method (SLM)
Under this method, an equal amount of depreciation is charged every year over the asset's useful life.
Formula:
Depreciation per year = (Cost of asset – Estimated scrap value) ÷ Estimated useful life
Example: A machine costs ₹1,00,000, scrap value ₹10,000, useful life 5 years.
Depreciation per year = (1,00,000 – 10,000) ÷ 5 = ₹18,000 each year.
The asset's book value falls by a fixed amount every year — a straight line on a graph.
Written Down Value Method (WDV)
Under this method, depreciation is charged at a fixed rate on the reducing balance of the asset each year.
Formula:
Depreciation for the year = Book value at the beginning of the year × Rate of depreciation
Example: Same machine ₹1,00,000, rate 20% p.a.
Year 1: 1,00,000 × 20% = ₹20,000
Year 2: (1,00,000 – 20,000) × 20% = 80,000 × 20% = ₹16,000
Year 3: (80,000 – 16,000) × 20% = 64,000 × 20% = ₹12,800
The depreciation amount keeps falling each year, but the rate stays constant.
| Feature | Straight Line Method | Written Down Value Method |
|---------|---------------------|--------------------------|
| Annual charge | Equal every year | Declines over time |
| Best for | Assets with steady usage (buildings, furniture) | Assets that lose value faster early on (vehicles, computers) |
| Total depreciation over life | Same under both methods | Same under both methods |
A worked illustration
On 1 April 2023, a firm buys furniture for ₹60,000. It uses SLM, useful life 10 years, scrap value nil.
Journal entries for the year ended 31 March 2024:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| 31 Mar 2024 | Depreciation A/c ……… Dr. | 6,000 | ||
| To Furniture A/c | 6,000 | |||
| (Depreciation: 60,000 ÷ 10 = 6,000) | ||||
| 31 Mar 2024 | Profit & Loss A/c ……… Dr. | 6,000 | ||
| To Depreciation A/c | 6,000 | |||
| (Depreciation transferred to P&L) |
Furniture Account (extract):
| Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
|---|---|---|---|---|---|
| 1 Apr 2023 | To Bank A/c | 60,000 | 31 Mar 2024 | By Depreciation A/c | 6,000 |
| 31 Mar 2024 | By Balance c/d | 54,000 | |||
| Total | 60,000 | Total | 60,000 | ||
| 1 Apr 2024 | To Balance b/d | 54,000 |
The furniture now stands in the books at ₹54,000 — its book value after one year.
A common confusion
Students often ask: "If we credit the Asset Account, does the asset physically disappear from the business?" No. The asset is still there, still being used. Only its accounting value has been reduced. The physical asset and its book value are two different things. The book value is simply the portion of the cost that has not yet been charged as expense.
Never confuse depreciation with amortisation (for intangible assets like patents) or depletion (for natural resources like oil wells). Depreciation is only for tangible fixed assets. Also, do not treat depreciation as a valuation exercise — it is an allocation of cost, not a measure of market value. A building may appreciate in market price while still being depreciated in the books.
The ₹80,000 modification is capitalised (added to the Machine account, raising it to ₹8,80,000), while the ₹2,000 routine maintenance is revenue expenditure. Depreciation for 2015-16 is ₹1,76,000 (20% on ₹8,00,000 plus 20% on ₹80,000).
Machine Account = ₹8,80,000; depreciation for 2015-16 = ₹1,76,000; total charge to Profit & Loss = ₹1,78,000 (₹1,76,000 depreciation + ₹2,000 maintenance).
Modification ₹80,000 is capitalised (Machine → ₹8,80,000); ₹2,000 maintenance is revenue. Depreciation 2015-16 = ₹1,60,000 + ₹16,000 = ₹1,76,000; P&L charge ₹1,78,000.
Concept
An addition or extension that becomes an integral part of the asset is capitalised and depreciated at the same rate as the asset. Routine repair and maintenance is revenue expenditure, charged straight to Profit and Loss.
Machine Account
| Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
|---|---|---|---|---|---|---|---|
| 2015 Apr. 01 | Balance b/d | 8,00,000 | 2016 Mar. 31 | Balance c/d | 8,80,000 | ||
| 2015 Apr. 01 | Bank (Modification) | 80,000 | |||||
| Total | 8,80,000 | Total | 8,80,000 |
Provision for Depreciation Account
| Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
|---|---|---|---|---|---|---|---|
| 2014 Mar. 31 | Balance c/d | 4,96,000 | 2015 Apr. 01 | Balance b/d | 3,20,000 | ||
| 2016 Mar. 31 | Depreciation | 1,76,000 | |||||
| Total | 4,96,000 | Total | 4,96,000 |
Working notes
- The cost of modification is capitalised; routine repair (₹2,000) is revenue expenditure.
- Balance of Provision for Depreciation on 01.04.2014 = depreciation for 2013-14 and 2014-15 = 2 × (20% × ₹8,00,000) = ₹3,20,000.
- Depreciation for 2015-16 = 20% × ₹8,00,000 (₹1,60,000) + 20% × ₹80,000 (₹16,000) = ₹1,76,000.
- Amount charged to Profit and Loss = depreciation ₹1,76,000 + repair & maintenance ₹2,000 = ₹1,78,000.
The Machine Account stands at ₹8,80,000; depreciation for 2015-16 is ₹1,76,000 and the total charge to the Profit and Loss Account is ₹1,78,000.
Showing the 12 most recent of 19 on this concept.
- CBSE 2026Set ANNUAL1 markMCQQ.Depreciation is related to -(a) Current assets(b) Fixed assets(c) Investments(d) Cash
›Reveal solutionSolution
Correct option: (b) Fixed assets.
Depreciation is the gradual, permanent fall in the value of a fixed asset due to use, wear and tear or obsolescence. So depreciation is related to fixed assets.
✓Final answer(b) Fixed assets.
- CBSE 2026Set ANNUAL1 markQ.Fill in the blank: Temporary rise or fall in the price of assets is called ________.
›Reveal solutionSolution
Answer: Fluctuation.
A temporary (short-term) rise or fall in the market price of an asset is called fluctuation. Unlike depreciation (a permanent fall), fluctuation is temporary and is generally not recorded for fixed assets.
✓Final answerFluctuation.
- CBSE 2025Set MARCH1 markQ.Cost of the asset ₹ 80,000 Scrap value ₹ 10,000 Useful life period – 10 years Find the Annual Depreciation.
›Reveal solutionSolution
Annual depreciation under the straight line method = ₹7,000.
Straight Line Method formula:
Annual Depreciation = (Cost of asset − Scrap value) ÷ Useful life
Item Amount (₹) Cost of the asset 80,000 Less: Scrap value 10,000 Depreciable amount 70,000 Useful life 10 years Annual Depreciation = 70,000 ÷ 10 = ₹7,000
The same amount, ₹7,000, is charged as depreciation every year throughout the 10-year life.
✓Final answerAnnual Depreciation = ₹7,000.
- CBSE 2025Set ANNUAL1 markMCQQ.Depreciation is related to -(a) Current Assets(b) Fixed Assets(c) Investment(d) Cash
›Reveal solutionSolution
Correct option: (b) Fixed Assets.
Depreciation is the permanent, gradual decrease in the value of a fixed (tangible) asset due to use, wear and tear, passage of time or obsolescence. So depreciation is related to fixed assets.
✓Final answer(b) Fixed Assets.
- CBSE 2024Set MARCH1 markQ.Decrease in the value of fixed assets is called __________
›Reveal solutionSolution
Answer: depreciation.
The permanent, gradual decline in the value of a fixed asset (machinery, furniture, building) due to use, wear and tear, obsolescence or lapse of time is called depreciation. It is charged as an expense each year against profit.
✓Final answerDecrease in the value of fixed assets is called depreciation.
- CBSE 2024Set ANNUAL1 markMCQQ.Depreciation is a process of(a) valuation of asset(b) allocation of cost of asset(c) amortization of loan(d) duplication of asset
›Reveal solutionSolution
Depreciation is the systematic allocation of a fixed asset's cost over its useful life.
A fixed asset is used over many accounting periods. Matching requires that each period bear its share of the asset's cost.
-
Depreciation allocates (cost − scrap value) across the asset's useful life.
-
It is not a valuation exercise; the book value after depreciation need not equal market value.
-
It is a non-cash charge representing the expired cost of the asset for the period.
✓Final answerOption (b) allocation of cost of asset.
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- CBSE 2024Set ANNUAL1 markMCQQ.Under straight-line method of depreciation, the amount of annual depreciation(a) increases every year(b) decreases every year(c) remains constant every year(d) increases some year and then decreases
›Reveal solutionSolution
Straight-line depreciation is equal every year because it is based on original cost.
In the straight-line method the annual depreciation = (Cost − Scrap value) ÷ Useful life, a figure fixed at the start.
-
Because the base (original cost) never changes, the charge is identical every year.
-
By contrast, the written-down-value method charges a fixed rate on the reducing book value, so its charge falls each year.
✓Final answerOption (c) remains constant every year.
-
- CBSE 2023Set ANNUAL1 markQ.Answer within 1 sentence: What is depreciation?
›Reveal solutionSolution
Depreciation = the gradual, permanent decline in a fixed asset's value, charged as an annual expense.
Depreciation spreads the cost of a long-lived asset (less its scrap value) over its useful life, matching the cost against the revenue the asset helps earn. Causes include regular use (wear and tear), passage of time, and obsolescence. It is a non-cash operating expense debited to the Profit & Loss Account — a core concept of the CHSE Odisha +2 Class-12 Commerce Accountancy depreciation chapter.
✓Final answerDepreciation is the permanent, gradual and continuing reduction in the book value of a fixed asset arising from use, wear and tear, efflux of time or obsolescence.
- CBSE 2022Set MARCH1 markMCQQ.The amount of depreciation charged under Diminishing balance method ________.(a) increases every year(b) remains constant every year(c) equals to its scrap value(d) decreases every year
›Reveal solutionSolution
Under the Diminishing Balance Method the amount of depreciation decreases every year — option (d). Core Kerala Plus One (DHSE) Accountancy depreciation concept.
In the diminishing (written-down) balance method, depreciation is charged at a fixed percentage on the book value at the beginning of each year (i.e. the reducing balance), not on the original cost. Because the book value keeps falling as depreciation accumulates, the rupee amount of depreciation calculated on it also keeps falling.
Example (10% on ₹1,00,000):
Year Opening book value (₹) Depreciation @10% (₹) Closing book value (₹) 1 1,00,000 10,000 90,000 2 90,000 9,000 81,000 3 81,000 8,100 72,900 The depreciation (10,000 → 9,000 → 8,100) clearly decreases every year. (Under the straight-line method it would instead remain constant.)
✓Final answerThe correct option is (d) decreases every year.
- CBSE 2022Set ANNUAL1 markMCQQ.Under straight-line method of depreciation, the amount of annual depreciation(a) increases every year(b) decreases every year(c) increases in some years and decreases in some other years(d) remains constant in every year
›Reveal solutionSolution
Straight-line method charges equal depreciation each year, so the annual amount stays constant.
- SLM = (Cost - Scrap value) / Useful life, computed on the original cost.
- Because the base (original cost) and rate do not change, the annual charge is the same every year — a straight line when plotted.
- Contrast: the diminishing/written-down value method charges on the reducing book value, so the amount decreases each year.
This is from Depreciation, Provisions and Reserves in CHSE Odisha +2 Accountancy, aligned with NCERT/CBSE.
✓Final answer(d) remains constant in every year.
- CBSE 2022Set ANNUAL1 markMCQQ.The method of depreciation applicable to a mine is(a) machine hour method(b) depletion method(c) diminishing balance method(d) straight-line method
›Reveal solutionSolution
A mine depletes as minerals are extracted, so the depletion (output) method applies.
- A mine/quarry is a wasting asset; its value reduces as the natural resource is exhausted.
- The depletion method charges depreciation per unit extracted = (Cost - Scrap)/Estimated total output x units extracted in the year.
- Machine-hour, diminishing-balance and straight-line methods suit manufacturing/fixed plant, not a wasting mineral asset.
This is from Depreciation, Provisions and Reserves in CHSE Odisha +2 Accountancy, aligned with NCERT/CBSE.
✓Final answer(b) depletion method.
- CBSE 2022Set ANNUAL1 markMCQQ.Under diminishing balance method of depreciation, the amount of annual depreciation(a) increases every year(b) decreases every year(c) increases in some years and decreases in some other years(d) remains constant in each year
›Reveal solutionSolution
Diminishing-balance depreciation is charged on the reducing book value, so it decreases each year.
- Under the WDV/diminishing-balance method, the same rate is applied to the book value at the start of each year.
- Since the book value keeps falling (after each year's charge), the depreciation amount is highest in year one and decreases every year.
- Contrast: the straight-line method keeps the amount constant.
This is from Depreciation, Provisions and Reserves in CHSE Odisha +2 Accountancy, aligned with NCERT/CBSE.
✓Final answer(b) decreases every year.
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