Depreciation | AccountsWizard

What is Depreciation?

When a business purchases a fixed asset like machinery, building, furniture, or vehicle, the asset is expected to provide benefits over several years. However, due to continuous use, passage of time, and other factors, the value of these assets decreases gradually. This decrease in the value of a fixed asset is called Depreciation.

Definition

Depreciation is the gradual and permanent decrease in the value of a fixed asset due to wear and tear, passage of time, obsolescence, accident, or any other cause. It represents the portion of the asset's cost that has been consumed or used up during the accounting period.

Simple Understanding

Think of depreciation like this: If you buy a car for ₹5,00,000 today, after one year of use, it won't be worth ₹5,00,000 anymore. It might be worth ₹4,50,000. This ₹50,000 decrease in value is depreciation. The same concept applies to all fixed assets in a business.

Key Point

Depreciation is not a cash expense—no money actually leaves the business. It's an accounting entry to show that the asset has lost some of its value. However, it is treated as an expense and reduces the profit of the business.

Meaning of Depreciation

The term "Depreciation" is derived from the Latin word "Depretium" where "De" means decline and "Pretium" means price. Thus, depreciation literally means decline in price or value.

Fall in Value

Depreciation represents the fall in the value of a fixed asset due to use, wear and tear, efflux of time, or obsolescence.

Allocation of Cost

It is the process of allocating the cost of a fixed asset over its useful life in a systematic and rational manner.

Expired Cost

Depreciation represents that portion of the cost of the asset which has expired or been used up during the accounting period.

Charge Against Revenue

It is an expense charged against revenue to match the cost of asset with the revenue generated by using that asset (Matching Principle).

Important Distinction

Depreciation – Decrease in value of tangible fixed assets (Machinery, Building, Furniture)
Amortization – Decrease in value of intangible assets (Patents, Copyrights, Goodwill)
Depletion – Decrease in value of natural resources (Mines, Oil Wells, Quarries)

Causes of Depreciation

There are several factors that cause a fixed asset to depreciate over time. Understanding these causes helps in determining the appropriate rate and method of depreciation:

1. Wear and Tear

Continuous use of an asset causes physical deterioration. Machinery running daily, vehicles being driven, or furniture being used regularly all lead to gradual wear and tear, reducing the asset's efficiency and value.

2. Passage of Time (Efflux of Time)

Even if an asset is not used, its value decreases simply due to passage of time. This is especially true for assets with a fixed life span like patents, leases, or copyrights. Time-based depreciation applies regardless of usage.

3. Obsolescence

Technological advancement or changes in market demand can make an asset outdated or obsolete. A perfectly functional machine may become useless because newer, more efficient models are available in the market.

4. Accidents

Unexpected accidents like fire, flood, earthquake, or collision can cause sudden and significant decrease in the value of an asset. Such events can partially or completely destroy the asset's usefulness.

5. Exhaustion/Depletion

Natural resources like mines, oil wells, and quarries get exhausted as their contents are extracted. The asset's value decreases proportionally to the amount of resource removed.

6. Expiry of Legal Rights

Certain assets like patents, copyrights, and leasehold properties have a limited legal life. Their value decreases as the expiry date approaches and becomes zero when the legal right expires.

7. Natural Forces

Exposure to natural elements like rain, wind, sunlight, moisture, and rust can deteriorate an asset over time. Buildings exposed to weather conditions or machinery kept in open areas face such depreciation.

8. Market Value Changes

Changes in market conditions, demand patterns, or economic factors can affect the value of assets. However, accounting depreciation is usually based on cost, not market value fluctuations.

Characteristics/Features of Depreciation

Depreciation has certain distinct characteristics that distinguish it from other types of expenses:

Continuous Process

Depreciation is a continuous and gradual process. It happens continuously from the date of purchase till the asset is disposed of or becomes worthless.

Decline in Value

It represents a decline or decrease in the book value of an asset. This decline can be measured and recorded in the books of accounts.

Permanent Decrease

Depreciation is a permanent decrease in the value of the asset. Unlike market fluctuations, once depreciation is charged, it cannot be reversed (except in case of revaluation).

Non-Cash Expense

Depreciation does not involve any cash outflow. It is merely a book entry to show the reduction in the value of an asset. No money leaves the business when depreciation is recorded.

Applies to Fixed Assets Only

Depreciation is charged only on fixed/non-current assets that have a useful life of more than one accounting period. Current assets and stock are not depreciated.

Based on Cost (Usually)

Depreciation is generally calculated on the original cost or revalued cost of the asset, not on its market value or selling price.

Charge Against Profit

Depreciation is treated as an expense and is charged to the Profit & Loss Account. It reduces the profit of the business for the accounting period.

Affects Balance Sheet

Depreciation reduces the book value of assets shown in the Balance Sheet. Assets are shown at their Written Down Value (Cost - Accumulated Depreciation).

Assets NOT Subject to Depreciation

Land – Generally does not depreciate as its value usually appreciates over time
Current Assets – Stock, Debtors, Cash, etc. are not depreciated
Investments – Not depreciated but may be revalued
Goodwill – Amortized, not depreciated (though terms are often used interchangeably)

Need and Objectives of Providing Depreciation

Depreciation is not just a mandatory accounting requirement but serves several important purposes in financial reporting and business management:

1. True and Fair Profit

Depreciation is charged to match the cost of asset with the revenue earned by using that asset (Matching Principle). This ensures that the profit shown is true and fair, not overstated.

2. True Value of Assets

By deducting depreciation, the Balance Sheet shows assets at their realistic book value, not at inflated original cost. This gives a true picture of the financial position.

3. Funds for Replacement

Since depreciation reduces profit but doesn't involve cash outflow, the corresponding amount remains in the business. This helps accumulate funds to replace the asset when it becomes useless.

4. Prevention of Dividend from Capital

Without depreciation, profits would be overstated. If dividends are paid from such inflated profits, it would effectively mean paying dividends out of capital, which is illegal.

5. Correct Cost of Production

For manufacturing concerns, depreciation on plant and machinery is part of the cost of production. Including it ensures correct product costing and appropriate selling price.

6. Tax Benefits

Depreciation is an allowable expense for tax purposes. By charging depreciation, taxable income is reduced, resulting in lower tax liability for the business.

Legal Requirement

As per the Companies Act, 2013 and Accounting Standards (AS-6 and AS-10), it is mandatory for companies to provide depreciation on fixed assets. The Act specifies minimum rates and methods to be followed.

Methods of Calculating Depreciation

There are several methods available for calculating depreciation. However, in the Grade 11 syllabus (as per DK Goel), we focus on the two most commonly used methods:

Straight Line Method (SLM)

Also called Fixed Instalment Method or Original Cost Method

Under this method, an equal amount of depreciation is charged every year throughout the useful life of the asset. The depreciation amount remains constant irrespective of the extent of use.

Written Down Value Method (WDV)

Also called Diminishing Balance Method or Reducing Balance Method

Under this method, depreciation is calculated at a fixed percentage on the book value (written down value) of the asset at the beginning of each year. The depreciation amount decreases every year.

Straight Line Method (SLM)

This is the simplest and most widely used method of calculating depreciation. Under this method, an equal amount of depreciation is charged every year over the useful life of the asset.

Formula for Straight Line Method

Annual Depreciation = (Cost of Asset − Scrap Value) ÷ Useful Life

Annual Depreciation = (Cost − Scrap Value) × Rate of Depreciation / 100

Formula for Rate of Depreciation (SLM)

Rate of Depreciation = [(Cost − Scrap Value) ÷ (Cost × Useful Life)] × 100

OR Simply

Rate of Depreciation = (100 ÷ Useful Life) %

(When scrap value is negligible or zero)

Key Terms

Cost of Asset: Purchase price + Installation charges + Transportation charges + Any other expense to bring the asset to usable condition
Scrap Value (Residual Value): The estimated value of the asset at the end of its useful life
Useful Life: The estimated period for which the asset will be used by the business
Depreciable Amount: Cost of Asset − Scrap Value

Advantages of SLM

Simple and Easy

The calculation is very simple. Just one formula gives the same depreciation amount for all years.

Asset Value Becomes Zero

The book value of asset can be reduced to zero or scrap value, unlike WDV method.

Suitable for Certain Assets

Ideal for assets like patents, copyrights, leases where depreciation is time-based, not usage-based.

Equal Charge Each Year

Same amount is charged every year, making profit comparison across years easier.

Disadvantages of SLM

Ignores Actual Usage

Same depreciation is charged whether the asset is used heavily or sparingly.

Unequal Burden on Profit

In later years, repair costs increase while depreciation remains same, leading to higher total charges on profit.

Interest Factor Ignored

Does not consider the interest on capital invested in the asset.

Illustration 1: Straight Line Method

Basic Calculation

A machine was purchased on 1st April 2022 for ₹2,00,000. Installation charges were ₹20,000. The estimated useful life is 10 years and scrap value is ₹20,000.

Purchase Price: ₹2,00,000
Installation Charges: ₹20,000
Useful Life: 10 years
Scrap Value: ₹20,000

Calculate annual depreciation using SLM and prepare Depreciation Schedule for first 3 years.

Solution

Step 1: Calculate Cost of Asset

Cost of Asset = Purchase Price + Installation Charges
Cost of Asset = ₹2,00,000 + ₹20,000 = ₹2,20,000

Step 2: Calculate Depreciable Amount

Depreciable Amount = Cost of Asset − Scrap Value
Depreciable Amount = ₹2,20,000 − ₹20,000 = ₹2,00,000

Step 3: Calculate Annual Depreciation

Annual Depreciation = Depreciable Amount ÷ Useful Life
Annual Depreciation = ₹2,00,000 ÷ 10 years = ₹20,000 per year

Step 4: Calculate Rate of Depreciation

Rate = (Annual Depreciation ÷ Cost) × 100
Rate = (₹20,000 ÷ ₹2,20,000) × 100 = 9.09% (approx)

OR Rate = 100 ÷ 10 = 10% on Depreciable Amount

Depreciation Schedule (SLM)

Year	Opening Book Value (₹)	Depreciation (₹)	Closing Book Value (₹)
2022-23	2,20,000	20,000	2,00,000
2023-24	2,00,000	20,000	1,80,000
2024-25	1,80,000	20,000	1,60,000
...continues till book value reaches ₹20,000 (Scrap Value)

Observation

Notice that the depreciation amount (₹20,000) remains constant every year under SLM. After 10 years, the book value will be equal to scrap value (₹20,000).

Written Down Value Method (WDV)

Under this method, depreciation is calculated at a fixed percentage on the book value (also called Written Down Value) of the asset at the beginning of each year. Since the book value decreases each year, the depreciation amount also decreases progressively.

Formula for Written Down Value Method

Depreciation = Book Value at Beginning of Year × Rate of Depreciation / 100

Where,

Book Value = Cost of Asset − Accumulated Depreciation till date

Formula for Rate of Depreciation (WDV)

Rate = [1 − ⁿ√(Scrap Value ÷ Cost)] × 100

Where 'n' is the useful life in years

In exams, the rate is usually given in the question. You don't need to calculate it.

Why is it called "Diminishing Balance"?

Because the base (book value) on which depreciation is calculated keeps diminishing every year. First year depreciation is highest, and it keeps reducing in subsequent years.

Advantages of WDV

Equal Burden on Profits

In early years, depreciation is high but repairs are low. In later years, depreciation is low but repairs are high. This evens out the total charge on profits.

Logical Method

More depreciation in early years reflects the actual pattern of value loss—assets lose more value when new.

Recognized by Income Tax Act

This method is recognized and prescribed by the Income Tax Act for calculating depreciation for tax purposes.

Suitable for Assets with Higher Initial Productivity

Assets like machinery, vehicles work more efficiently when new and their productivity declines over time.

Disadvantages of WDV

Book Value Never Becomes Zero

No matter how long depreciation is charged, the book value will always remain some positive amount (though negligible).

Complex Calculations

Depreciation amount changes every year, requiring fresh calculations annually.

Difficulty in Rate Determination

Calculating the appropriate rate of depreciation involves complex mathematical formulas.

Illustration 2: Written Down Value Method

Basic Calculation

On 1st April 2022, a company purchased furniture for ₹1,00,000. Depreciation is to be charged @ 10% p.a. on Written Down Value Method.

Cost of Furniture: ₹1,00,000
Rate of Depreciation: 10% p.a. on WDV
Date of Purchase: 1st April 2022

Prepare Depreciation Schedule for 4 years ending 31st March.

Solution

Year 1 (2022-23)

Opening Book Value = ₹1,00,000
Depreciation = ₹1,00,000 × 10/100 = ₹10,000
Closing Book Value = ₹1,00,000 − ₹10,000 = ₹90,000

Year 2 (2023-24)

Opening Book Value = ₹90,000
Depreciation = ₹90,000 × 10/100 = ₹9,000
Closing Book Value = ₹90,000 − ₹9,000 = ₹81,000

Year 3 (2024-25)

Opening Book Value = ₹81,000
Depreciation = ₹81,000 × 10/100 = ₹8,100
Closing Book Value = ₹81,000 − ₹8,100 = ₹72,900

Year 4 (2025-26)

Opening Book Value = ₹72,900
Depreciation = ₹72,900 × 10/100 = ₹7,290
Closing Book Value = ₹72,900 − ₹7,290 = ₹65,610

Depreciation Schedule (WDV)

Year	Opening Book Value (₹)	Rate (%)	Depreciation (₹)	Closing Book Value (₹)
2022-23	1,00,000	10%	10,000	90,000
2023-24	90,000	10%	9,000	81,000
2024-25	81,000	10%	8,100	72,900
2025-26	72,900	10%	7,290	65,610

Observation

Notice that the depreciation amount decreases every year under WDV method: ₹10,000 → ₹9,000 → ₹8,100 → ₹7,290. The rate (10%) remains constant, but it is applied on a reducing base.

Comparison: SLM vs WDV Method

Understanding the differences between these two methods helps in choosing the appropriate method for different types of assets:

S.No.	Basis	Straight Line Method (SLM)	Written Down Value Method (WDV)
1	Amount of Depreciation	Remains constant every year	Decreases every year
2	Calculation Base	Original cost of the asset	Written Down Value (Book Value)
3	Book Value	Can be reduced to zero or scrap value	Can never be reduced to zero
4	Total Charge on Profit	Increases in later years (due to higher repairs)	Remains more or less uniform
5	Calculation	Simple and easy	Comparatively complex
6	Suitable For	Assets with uniform utility (Patents, Leases, Copyright)	Assets with declining utility (Machinery, Vehicles)
7	Recognition	Recognized by Companies Act	Recognized by Income Tax Act
8	Other Names	Fixed Instalment Method, Original Cost Method	Diminishing Balance Method, Reducing Balance Method

Swipe left to see full table

Journal Entries for Depreciation

There are two methods of recording depreciation in the books of accounts:

Method 1: When Depreciation is Charged to Asset Account

No Provision for Depreciation Account

Journal Entry

Depreciation A/c Dr. XXXX

To Asset A/c (e.g., Machinery A/c) XXXX

(Being depreciation charged on asset)

Effect: Asset account is directly credited and its balance reduces. Asset appears in Balance Sheet at reduced value.

Method 2: When Provision for Depreciation A/c is Maintained

Accumulated Depreciation Account

Journal Entry

Depreciation A/c Dr. XXXX

To Provision for Depreciation A/c XXXX

(Being depreciation provided on asset)

Effect: Asset account remains at original cost. Provision account accumulates depreciation year after year. Both appear separately in Balance Sheet.

Transfer to Profit & Loss Account

At the end of the year, Depreciation Account is closed by transferring to Profit & Loss Account:

Profit & Loss A/c Dr. XXXX

To Depreciation A/c XXXX

(Being depreciation transferred to P&L A/c)

Entry for Purchase of Asset

When Asset is Purchased

Asset A/c (e.g., Machinery A/c) Dr. XXXX

To Cash/Bank A/c XXXX

(Being asset purchased for cash/by cheque)

Asset A/c (e.g., Machinery A/c) Dr. XXXX

To Vendor's A/c / Creditor's A/c XXXX

(Being asset purchased on credit)

Comprehensive Illustrations

Illustration 3: SLM with Ledger Accounts (Without Provision)

Comprehensive Example

On 1st April 2021, ABC Ltd. purchased a machine for ₹5,00,000. Depreciation is to be charged @ 10% p.a. on Straight Line Method. Books are closed on 31st March every year.

Prepare:

1. Machinery Account for 3 years
2. Depreciation Account for 3 years

Solution

Calculation of Annual Depreciation

Annual Depreciation = Cost × Rate / 100
Annual Depreciation = ₹5,00,000 × 10/100 = ₹50,000 per year

Machinery Account (in the books of ABC Ltd.)

Dr.				Cr.
Date	Particulars	J.F.	Amount (₹)	Date	Particulars	J.F.	Amount (₹)
2021				2022
Apr 1	To Bank A/c		5,00,000	Mar 31	By Depreciation A/c		50,000
				Mar 31	By Balance c/d		4,50,000
			5,00,000				5,00,000
2022				2023
Apr 1	To Balance b/d		4,50,000	Mar 31	By Depreciation A/c		50,000
				Mar 31	By Balance c/d		4,00,000
			4,50,000				4,50,000
2023				2024
Apr 1	To Balance b/d		4,00,000	Mar 31	By Depreciation A/c		50,000
				Mar 31	By Balance c/d		3,50,000
			4,00,000				4,00,000
2024
Apr 1	To Balance b/d		3,50,000

Depreciation Account

Dr.				Cr.
Date	Particulars	J.F.	Amount (₹)	Date	Particulars	J.F.	Amount (₹)
2022				2022
Mar 31	To Machinery A/c		50,000	Mar 31	By Profit & Loss A/c		50,000
			50,000				50,000
2023				2023
Mar 31	To Machinery A/c		50,000	Mar 31	By Profit & Loss A/c		50,000
			50,000				50,000
2024				2024
Mar 31	To Machinery A/c		50,000	Mar 31	By Profit & Loss A/c		50,000
			50,000				50,000

Illustration 4: WDV with Provision for Depreciation Account

Comprehensive Example

XYZ Ltd. purchased a vehicle on 1st April 2021 for ₹8,00,000. Depreciation is charged @ 15% p.a. on Written Down Value Method. The company maintains Provision for Depreciation Account.

Prepare for 3 years ending 31st March:

1. Vehicle Account
2. Provision for Depreciation Account
3. Depreciation Account

Solution

Calculation of Depreciation

Year 1 (2021-22):
Depreciation = ₹8,00,000 × 15/100 = ₹1,20,000
WDV at end = ₹8,00,000 − ₹1,20,000 = ₹6,80,000

Year 2 (2022-23):
Depreciation = ₹6,80,000 × 15/100 = ₹1,02,000
WDV at end = ₹6,80,000 − ₹1,02,000 = ₹5,78,000

Year 3 (2023-24):
Depreciation = ₹5,78,000 × 15/100 = ₹86,700
WDV at end = ₹5,78,000 − ₹86,700 = ₹4,91,300

Vehicle Account

Dr.				Cr.
Date	Particulars	J.F.	Amount (₹)	Date	Particulars	J.F.	Amount (₹)
2021				2022
Apr 1	To Bank A/c		8,00,000	Mar 31	By Balance c/d		8,00,000
			8,00,000				8,00,000
2022				2023
Apr 1	To Balance b/d		8,00,000	Mar 31	By Balance c/d		8,00,000
			8,00,000				8,00,000
2023				2024
Apr 1	To Balance b/d		8,00,000	Mar 31	By Balance c/d		8,00,000
			8,00,000				8,00,000

Note

Observe that Vehicle Account always shows the original cost (₹8,00,000) when Provision for Depreciation Account is maintained. The depreciation is accumulated in a separate account.

Provision for Depreciation Account

Dr.				Cr.
Date	Particulars	J.F.	Amount (₹)	Date	Particulars	J.F.	Amount (₹)
2022				2022
Mar 31	To Balance c/d		1,20,000	Mar 31	By Depreciation A/c		1,20,000
			1,20,000				1,20,000
2023				2022
Mar 31	To Balance c/d		2,22,000	Apr 1	By Balance b/d		1,20,000
				Mar 31	By Depreciation A/c		1,02,000
			2,22,000				2,22,000
2024				2023
Mar 31	To Balance c/d		3,08,700	Apr 1	By Balance b/d		2,22,000
				Mar 31	By Depreciation A/c		86,700
			3,08,700				3,08,700

Depreciation Account (for each year)

Dr.				Cr.
Date	Particulars	J.F.	Amount (₹)	Date	Particulars	J.F.	Amount (₹)
2022				2022
Mar 31	To Provision for Dep. A/c		1,20,000	Mar 31	By Profit & Loss A/c		1,20,000
			1,20,000				1,20,000

(Similarly for 2022-23: ₹1,02,000 and for 2023-24: ₹86,700)

Balance Sheet Presentation (as on 31st March 2024)

Fixed Assets:
Vehicle (at cost)                    ₹8,00,000
Less: Provision for Depreciation   ₹3,08,700
─────────────────────────────────────
Written Down Value              ₹4,91,300

Additional Practical Illustrations

Illustration 5: Asset Purchased During the Year

Pro-rata Depreciation

M/s Sharma Enterprises purchased the following machinery:

1st April 2021: Machine A for ₹3,00,000
1st October 2021: Machine B for ₹2,00,000
1st January 2022: Machine C for ₹1,20,000

Depreciation is charged @ 10% p.a. on Straight Line Method. Books are closed on 31st March every year.

Calculate depreciation for the year 2021-22.

Solution

Important Concept: Pro-rata Depreciation

When an asset is purchased during the year (not at the beginning), depreciation is charged only for the period the asset was used. This is called Pro-rata Depreciation.

Formula: Depreciation = Cost × Rate × (No. of Months Used / 12)

Machine A (Purchased 1st April 2021)

Period of use = 1st April 2021 to 31st March 2022 = 12 months
Depreciation = ₹3,00,000 × 10/100 × 12/12
Depreciation = ₹30,000

Machine B (Purchased 1st October 2021)

Period of use = 1st October 2021 to 31st March 2022 = 6 months
Depreciation = ₹2,00,000 × 10/100 × 6/12
Depreciation = ₹2,00,000 × 10/100 × 0.5
Depreciation = ₹10,000

Machine C (Purchased 1st January 2022)

Period of use = 1st January 2022 to 31st March 2022 = 3 months
Depreciation = ₹1,20,000 × 10/100 × 3/12
Depreciation = ₹1,20,000 × 10/100 × 0.25
Depreciation = ₹3,000

Total Depreciation for 2021-22

Total Depreciation = ₹30,000 + ₹10,000 + ₹3,000 = ₹43,000

Summary Table

Machine	Date of Purchase	Cost (₹)	Months Used	Rate	Depreciation (₹)
Machine A	01-04-2021	3,00,000	12	10%	30,000
Machine B	01-10-2021	2,00,000	6	10%	10,000
Machine C	01-01-2022	1,20,000	3	10%	3,000
Total Depreciation					43,000

Illustration 6: WDV Method with Addition During Year

Comprehensive Problem

On 1st April 2020, PQR Ltd. had machinery valued at ₹4,00,000 (after depreciation). On 1st October 2020, additional machinery was purchased for ₹2,00,000. Depreciation is charged @ 15% p.a. on WDV Method.

Calculate depreciation for the year 2020-21 and show the Machinery Account.

Solution

Depreciation on Old Machinery

Opening WDV = ₹4,00,000
Period = Full year (12 months)
Depreciation = ₹4,00,000 × 15/100 = ₹60,000

Depreciation on New Machinery

Cost = ₹2,00,000
Period = 1st October 2020 to 31st March 2021 = 6 months
Depreciation = ₹2,00,000 × 15/100 × 6/12
Depreciation = ₹2,00,000 × 15/100 × 0.5 = ₹15,000

Total Depreciation for 2020-21

Total = ₹60,000 + ₹15,000 = ₹75,000

Machinery Account

Dr.				Cr.
Date	Particulars	J.F.	Amount (₹)	Date	Particulars	J.F.	Amount (₹)
2020				2021
Apr 1	To Balance b/d		4,00,000	Mar 31	By Depreciation A/c		75,000
Oct 1	To Bank A/c		2,00,000	Mar 31	By Balance c/d		5,25,000
			6,00,000				6,00,000

Illustration 7: Sale of Fixed Asset

Profit/Loss on Sale

On 1st April 2019, ABC Ltd. purchased a machine for ₹5,00,000. On 30th September 2022, the machine was sold for ₹2,80,000. Depreciation is charged @ 10% p.a. on SLM basis. Books are closed on 31st March every year.

Calculate:

1. Total depreciation charged till date of sale
2. Book value on the date of sale
3. Profit or Loss on sale

Also show Machinery Account for all years.

Solution

Important: Depreciation in Year of Sale

When an asset is sold during the year, depreciation is charged only up to the date of sale, not for the full year.

Step 1: Calculate Annual Depreciation

Annual Depreciation = ₹5,00,000 × 10/100 = ₹50,000 per year

Step 2: Calculate Total Depreciation Till Sale

Year 2019-20: Full year = ₹50,000
Year 2020-21: Full year = ₹50,000
Year 2021-22: Full year = ₹50,000
Year 2022-23: 6 months (Apr to Sep) = ₹50,000 × 6/12 = ₹25,000

Total Depreciation = ₹50,000 + ₹50,000 + ₹50,000 + ₹25,000 = ₹1,75,000

Step 3: Calculate Book Value on Date of Sale

Book Value = Cost − Total Depreciation
Book Value = ₹5,00,000 − ₹1,75,000 = ₹3,25,000

Step 4: Calculate Profit or Loss on Sale

Sale Price = ₹2,80,000
Book Value = ₹3,25,000

Since Sale Price < Book Value,
Loss on Sale = ₹3,25,000 − ₹2,80,000 = ₹45,000

Profit or Loss Rule

If Sale Price > Book Value → Profit on Sale
If Sale Price < Book Value → Loss on Sale
If Sale Price = Book Value → No Profit, No Loss

Machinery Account

Dr.				Cr.
Date	Particulars	J.F.	Amount (₹)	Date	Particulars	J.F.	Amount (₹)
2019				2020
Apr 1	To Bank A/c		5,00,000	Mar 31	By Depreciation A/c		50,000
				Mar 31	By Balance c/d		4,50,000
			5,00,000				5,00,000
2020				2021
Apr 1	To Balance b/d		4,50,000	Mar 31	By Depreciation A/c		50,000
				Mar 31	By Balance c/d		4,00,000
			4,50,000				4,50,000
2021				2022
Apr 1	To Balance b/d		4,00,000	Mar 31	By Depreciation A/c		50,000
				Mar 31	By Balance c/d		3,50,000
			4,00,000				4,00,000
2022				2022
Apr 1	To Balance b/d		3,50,000	Sep 30	By Depreciation A/c		25,000
				Sep 30	By Bank A/c (Sale)		2,80,000
				Sep 30	By Loss on Sale A/c		45,000
			3,50,000				3,50,000

Journal Entry for Sale of Machinery

Bank A/c Dr. 2,80,000

Depreciation A/c Dr. 25,000

Loss on Sale of Machinery A/c Dr. 45,000

To Machinery A/c 3,50,000

(Being machinery sold at a loss)

Illustration 8: Sale of Asset at Profit

Profit on Disposal

On 1st April 2020, XYZ Co. purchased furniture for ₹80,000. Depreciation is charged @ 10% p.a. on WDV Method. On 31st March 2023, the furniture was sold for ₹60,000.

Calculate profit or loss on sale and pass the journal entry.

Solution

Step 1: Calculate Depreciation for Each Year (WDV)

Year 1 (2020-21):
Opening Value = ₹80,000
Depreciation = ₹80,000 × 10% = ₹8,000
Closing Value = ₹80,000 − ₹8,000 = ₹72,000

Year 2 (2021-22):
Opening Value = ₹72,000
Depreciation = ₹72,000 × 10% = ₹7,200
Closing Value = ₹72,000 − ₹7,200 = ₹64,800

Year 3 (2022-23):
Opening Value = ₹64,800
Depreciation = ₹64,800 × 10% = ₹6,480
Closing Value = ₹64,800 − ₹6,480 = ₹58,320

Step 2: Calculate Book Value on Date of Sale

Book Value (WDV) on 31st March 2023 = ₹58,320

Step 3: Calculate Profit on Sale

Sale Price = ₹60,000
Book Value = ₹58,320

Since Sale Price > Book Value,
Profit on Sale = ₹60,000 − ₹58,320 = ₹1,680

Journal Entry for Sale at Profit

Bank A/c Dr. 60,000

Depreciation A/c (for current year) Dr. 6,480

To Furniture A/c 64,800

To Profit on Sale of Furniture A/c 1,680

(Being furniture sold at a profit)

Treatment of Profit/Loss

Profit on Sale is credited to Profit & Loss A/c (Income)
Loss on Sale is debited to Profit & Loss A/c (Expense)

Quick Revision Points

Key Formulas to Remember

Straight Line Method (SLM)

Depreciation = (Cost − Scrap Value) ÷ Useful Life

Written Down Value Method (WDV)

Depreciation = Book Value × Rate / 100

Pro-rata Depreciation

Depreciation = Annual Dep. × (Months Used ÷ 12)

✓

Depreciation is the gradual decrease in value of fixed assets due to use, time, or obsolescence.

✓

SLM charges equal depreciation every year; WDV charges decreasing depreciation.

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Under SLM, depreciation is calculated on original cost; under WDV, on book value.

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Depreciation is a non-cash expense – no money leaves the business.

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Land is not depreciated; its value generally appreciates over time.

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On sale: Sale Price > Book Value = Profit; Sale Price < Book Value = Loss.

Lesson Complete!

You've mastered the concepts of Depreciation including SLM, WDV methods, and accounting entries. Practice more problems to gain confidence!

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