Depreciation — Lesson
1) Hook — Real-Life Story to Grab Attention
Imagine you bought a brand-new Royal Enfield Bullet motorcycle for ₹1,50,000. Every year, as you ride it through the bustling streets of Mumbai, it loses some of its value due to wear and tear, mileage, and age. After 5 years, if you try to sell it, you won't get the original ₹1,50,000 but a much lower price. This gradual reduction in the motorcycle's value is exactly what accountants call Depreciation.
2) Core Concepts — Understanding Depreciation
Definition: Depreciation is the systematic allocation of the cost of a tangible fixed asset over its useful life.
In simpler terms, it means spreading out the cost of an asset over the years it is used to match the expense with the revenue it helps to generate.
Why is Depreciation Important?
- To show the true value of assets in the books.
- To match expenses with income in the correct accounting period (Matching Principle).
- To help businesses set aside funds for asset replacement.
Types of Assets Subject to Depreciation
- Machinery
- Vehicles (e.g., trucks, bikes)
- Furniture and Fixtures
- Buildings (except land)
Methods of Depreciation
| Method | Explanation | Example |
|---|---|---|
| Straight Line Method (SLM) | Equal amount of depreciation charged every year. | ₹1,00,000 asset with 10 years life → ₹10,000/year |
| Written Down Value Method (WDV) | Depreciation charged on the reducing balance (book value) each year. | ₹1,00,000 asset, 10% rate → Year 1: ₹10,000; Year 2: ₹9,000 |
Example: Calculating Depreciation by Both Methods
| Year | SLM Depreciation (₹) | WDV Depreciation (₹) | WDV Book Value (₹) |
|---|---|---|---|
| 1 | 10,000 | 10,000 | 90,000 |
| 2 | 10,000 | 9,000 | 81,000 |
| 3 | 10,000 | 8,100 | 72,900 |
3) Key Formulas / Rules
Straight Line Method (SLM):
Depreciation Expense = Cost of Asset - Residual Value ÷ Useful Life
Usually, Residual Value = 0 unless specified.
Written Down Value Method (WDV):
Depreciation Expense = Book Value at Beginning of Year × Depreciation Rate (%)
Book Value at Beginning of Year = Cost - Accumulated Depreciation
Depreciation Rate (if useful life given):
Depreciation Rate (%) = 100 ÷ Useful Life (in years)
4) Did You Know?
In India, the Income Tax Department allows businesses to claim depreciation as a deduction to reduce taxable income. The rates of depreciation vary for different assets as per the Income Tax Act. For example, computers have a higher depreciation rate (40%) than buildings (5%). This encourages businesses to invest in new technology!
5) Exam Tips — Common Mistakes and Board Exam Patterns
- Always check if Residual Value is given: If yes, subtract it before calculating depreciation.
- Do not confuse SLM and WDV: SLM charges equal depreciation every year, WDV charges reducing depreciation.
- Write down the formula clearly: Marks are awarded for correct formula even if final answer is wrong.
- Show stepwise calculation: Especially for WDV method, show book value after each year.
- Previous Year Question Pattern: Usually, 4-6 marks questions involve calculating depreciation for 2-3 years using either method.
- Practice with Indian examples: Assets like machinery, vehicles, and furniture are common in questions.
Depreciation — Mcq
Depreciation — Mnemonic
Mnemonic 1: "D.E.P.R.E.C.I.A.T.E" to remember key aspects of Depreciation 📉
- Diminishing value
- Expense allocation
- Periodic charge
- Reasonable estimate
- Economic life
- Cost of asset
- Impairment consideration
- Accumulated depreciation
- Time basis
- End value (residual/scrap value)
Mnemonic 2: Funny Hindi phrase for Depreciation methods 📊
"सीधा घटाओ, दुगुना लगाओ, और यूनिट से समझाओ!"
- सीधा घटाओ = Straight Line Method (SLM)
- दुगुना लगाओ = Double Declining Balance Method (DDB)
- यूनिट से समझाओ = Units of Production Method
— Easy way to recall the 3 main depreciation methods in CBSE!
Mnemonic 3: Formula memory rhyme for Straight Line Method (SLM) 📏
"Cost minus Scrap, divide by Life, yearly charge is your depreciation strife!"
Formula:
Depreciation Expense = (Cost of Asset – Residual Value) / Useful Life
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