Q.Profit or loss on realization of depreciation fund investment is transferred to –
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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- Obsolescence (a computer becomes outdated long before it physically breaks)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 | …
Since the Depreciation Fund (Sinking Fund) Investment was purchased using monies set aside in the Depreciation Fund, any profit or loss on realizing (selling) that investment is adjusted back into the Depreciation Fund A/c …
The correct option is (c) Depreciation Fund A/c.
Under the Depreciation Fund (Sinking Fund) Method, the firm invests an amount equal to the annual depreciation charge in outside securities (Depreciation Fund Investments). When these investments are realised (sold) at the time the original asset needs replacement, any profit or loss arising on their sale is transferred to the Depreciation Fund Account itself (increasing or decreasing the fund that will be used to …
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 d …
- 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 tempo …
- 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 … - 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 obsolesce …
- 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 ea …
- 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. …
- 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. …
- 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 Accou …
- 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 (₹) |
|---|---|---|---| …
- 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. …
- 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. …
- 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. …
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