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📘 Chapter 14 Class 11 Accountancy CBSE Code 055

Depreciation
Provisions & Methods

Understand why assets lose value and how to calculate, record, and account for that loss. Master SLM vs WDV, both recording methods (charging to asset and provision account), and the Asset Disposal Account — with fully worked journal entries and Ledger accounts. High-scoring chapter in CBSE and CUET.

2Methods
20MCQs
20Quiz Qs
FreeAlways
📌 The Core Idea — Why Assets Lose Value

Think of it like a car — it loses value every year just by being used

When a business buys machinery for ₹1,00,000, that machinery does not stay worth ₹1,00,000 forever. Each year it gets older, more worn out, and less valuable. Depreciation is the accounting method of recognising this gradual decrease in value as an expense every year. Without recording depreciation, profit would be overstated and assets would be shown at wrong values.

1. Meaning of Depreciation

Depreciation is the permanent, gradual, and continuous decrease in the value of a fixed (tangible) asset due to use, passage of time, wear and tear, or obsolescence. It is charged as an expense in the Profit & Loss Account every year.

Key words to remember: Permanent (not temporary)  |  Gradual (slow, over time)  |  Continuous (every accounting period)  |  Fixed assets only (land is NOT depreciated)  |  Charged to P&L Account (expense)

2. Features of Depreciation

1

Permanent Decrease

The fall in value is permanent, not temporary. A machine that has been used cannot regain its original value (unlike a temporary fall in market price of investments).

2

Applied to Fixed Tangible Assets

Depreciation applies to physical fixed assets like machinery, furniture, vehicles, buildings. Land is NOT depreciated (it has unlimited life). Intangible assets are amortised, not depreciated.

3

Non-Cash Expense

Depreciation reduces profit but does NOT involve any cash outflow in the year of charging. The cash went out when the asset was originally purchased.

4

Allocated Over Useful Life

The cost of an asset is spread over its useful life — not charged entirely in the year of purchase. This follows the Matching Principle of accounting.

3. Causes of Depreciation

1

Wear and Tear

Physical deterioration due to regular use. A machine used daily wears out faster than one used rarely. Most common cause for all manufacturing equipment.

2

Obsolescence

Asset becomes outdated due to new technology or changing demand. A computer from 2010 may be fully working but obsolete because better models exist.

3

Passage of Time

Some assets like leases, patents, and copyrights reduce in value simply because time passes, even without use. A 10-year lease loses 1/10th value each year.

4

Depletion

For natural resource assets (mines, quarries, oil wells), value reduces as the resource is extracted. Once the mine is exhausted, it has no value.

5

Accidents and Natural Disasters

Unexpected damage from floods, fire, or accidents reduces asset value permanently beyond the amount covered by insurance.

6

Effluxion of Time (For Legal Rights)

Intangible assets like patents, trademarks, and goodwill expire after a fixed legal period. The accounting standard requires amortisation over this period.

4. Need for Providing Depreciation

1

True and Fair View of Assets

Without depreciation, assets remain at original cost in Balance Sheet forever, giving a misleading picture. Depreciation ensures assets are shown at their correct (reduced) value.

2

Correct Profit Calculation

Depreciation is an expense. If not charged, profit is overstated. Overstated profit means excess tax payment and excess dividend to shareholders — both harmful to business.

3

Funds for Asset Replacement

By charging depreciation (a non-cash expense), the business retains cash within the firm. Over the asset's life, enough funds accumulate to replace the asset when it wears out.

4

Matching Principle

The cost of an asset should be matched against the revenue it helps generate. Depreciation spreads cost over useful life — matching expense with benefit period.

5. Factors Determining Amount of Depreciation

FactorMeaningImpact
Cost of AssetTotal cost including purchase price, freight, installation chargesHigher cost → higher depreciation
Estimated Useful LifeNumber of years the asset will be used productivelyLonger life → lower annual depreciation
Residual/Scrap ValueExpected value at end of useful life (resale or scrap value)Higher scrap value → lower depreciable amount
Method of DepreciationSLM or WDV — different methods give different annual amountsSLM = equal amounts; WDV = declining amounts
Cost of InstallationAny cost incurred to make asset ready for useAdded to cost of asset before calculating depreciation
Depreciable Amount = Cost of Asset − Estimated Residual (Scrap) Value
This is the total amount that will be depreciated over the asset's useful life.

6. Method 1 — Straight Line Method (SLM)

Also called Fixed Instalment Method or Original Cost Method. Under SLM, a fixed, equal amount of depreciation is charged every year over the useful life of the asset. The amount charged each year is the same.

Annual Depreciation = (Cost of Asset − Residual Value) ÷ Useful Life (years)
Rate of Depreciation (%) = Annual Depreciation ÷ Cost of Asset × 100
📈 SLM Worked Example
Question: Machinery purchased on 1 April 2023 for ₹1,20,000. Residual value ₹20,000. Useful life 5 years. Accounts closed 31 March every year. Prepare Machinery A/c for 3 years under SLM (Charging to Asset Account method).
Calculation:
Annual Depreciation = (₹1,20,000 − ₹20,000) ÷ 5 = ₹1,00,000 ÷ 5 = ₹20,000 per year
Rate = ₹20,000 ÷ ₹1,20,000 × 100 = 16.67% on original cost
Year 1 book value: ₹1,20,000 − ₹20,000 = ₹1,00,000
Year 2 book value: ₹1,00,000 − ₹20,000 = ₹80,000
Year 3 book value: ₹80,000 − ₹20,000 = ₹60,000
Dr.                      Machinery Account                      Cr.
DateParticularsL.F.Amount (₹)DateParticularsL.F.Amount (₹)
1 Apr 23To Bank A/c1,20,00031 Mar 24By Depreciation A/c20,000
31 Mar 24By Balance c/d1,00,000
Total1,20,000Total1,20,000
1 Apr 24To Balance b/d1,00,00031 Mar 25By Depreciation A/c20,000
31 Mar 25By Balance c/d80,000
Total1,00,000Total1,00,000
1 Apr 25To Balance b/d80,00031 Mar 26By Depreciation A/c20,000
31 Mar 26By Balance c/d60,000
Total80,000Total80,000
SLM Key: Depreciation ₹20,000 is the same every year. Book value reduces by ₹20,000 each year. After 5 years book value = ₹20,000 (residual value). At that point, no more depreciation is charged.

7. Method 2 — Written Down Value Method (WDV)

Also called Diminishing Balance Method or Reducing Balance Method. Under WDV, depreciation is charged at a fixed percentage on the book value (WDV) at the beginning of each year. Because book value decreases every year, the amount of depreciation also decreases every year.

Annual Depreciation = Book Value at Beginning of Year × Rate of Depreciation (%)
Book Value = Cost (Year 1) or Previous Year's Closing Book Value (subsequent years)
📈 WDV Worked Example
Question: Same machinery ₹1,20,000 purchased 1 April 2023. Depreciation @20% per annum on WDV. Prepare Machinery A/c for 3 years.
Calculation:
Year 1 (2023-24): 20% on ₹1,20,000 = ₹24,000 | Closing WDV = ₹96,000
Year 2 (2024-25): 20% on ₹96,000 = ₹19,200 | Closing WDV = ₹76,800
Year 3 (2025-26): 20% on ₹76,800 = ₹15,360 | Closing WDV = ₹61,440
Notice: Depreciation decreases each year. Asset never becomes zero under WDV.
Dr.                 Machinery Account (WDV @20%)                 Cr.
DateParticularsL.F.Amount (₹)DateParticularsL.F.Amount (₹)
1 Apr 23To Bank A/c1,20,00031 Mar 24By Depreciation A/c24,000
31 Mar 24By Balance c/d96,000
Total1,20,000Total1,20,000
1 Apr 24To Balance b/d96,00031 Mar 25By Depreciation A/c19,200
31 Mar 25By Balance c/d76,800
Total96,000Total96,000
1 Apr 25To Balance b/d76,80031 Mar 26By Depreciation A/c15,360
31 Mar 26By Balance c/d61,440
Total76,800Total76,800

8. SLM vs WDV — Comparison

BasisSLM (Fixed Instalment)WDV (Diminishing Balance)
Basis of calculationOriginal (Historical) CostWritten Down Value (Book Value) at start of year
Annual amountFixed — same every yearDecreasing — falls each year
Asset value at endReaches residual/scrap valueNever becomes zero (theoretically)
Effect on profitEqual impact on profit every yearProfits rise in later years (lower depreciation)
Suitable forAssets with uniform usage (furniture, leases)Assets with higher use in early years (machinery, vehicles)
Recognised byIncome Tax Act (for calculating taxable income)Income Tax Act (standard method for IT purposes)
Repair costsRise in later years (inconsistent total charge)Combined Depr. + Repairs is more even across years
Simple to calculate?Yes — easiest methodSlightly complex (% on changing base)

9. Methods of Recording Depreciation

There are two methods of recording depreciation in the books:

Method A — Charging to Asset Account (Direct Method)

Depreciation is directly deducted from the asset account. The asset account always shows the net book value (WDV). This is the method used in the worked examples above.

Journal Entry — Method A:
Depreciation A/c    Dr. (annual amount)
     To Asset A/c          Cr. (same amount)

At year end, transfer depreciation to P&L Account:
Profit & Loss A/c    Dr.
     To Depreciation A/c    Cr.
Method B — By Creating Provision for Depreciation Account

Under this method, the asset account is NOT reduced — it always remains at original cost. A separate Provision for Depreciation A/c (or Accumulated Depreciation A/c) accumulates the total depreciation charged so far. The net book value = Cost − Accumulated Provision for Depreciation.

Journal Entries — Method B:
(i) Charging depreciation each year:
Depreciation A/c                                  Dr.
     To Provision for Depreciation A/c      Cr.

(ii) Transfer to P&L Account each year:
Profit & Loss A/c         Dr.
     To Depreciation A/c      Cr.

Asset A/c remains at original cost throughout. In Balance Sheet: show Cost − Provision for Depreciation = Net Book Value.
📈 Method B Worked Example — Provision for Depreciation
Machinery ₹1,20,000 purchased 1 April 2023. SLM, ₹20,000 depreciation per year. Show Machinery A/c and Provision for Depreciation A/c for 3 years under Method B.
Dr.                       Machinery Account (Method B)                       Cr.
DateParticularsL.F.Amount (₹)DateParticularsL.F.Amount (₹)
1 Apr 23To Bank A/c1,20,00031 Mar 24By Balance c/d1,20,000
1,20,0001,20,000
1 Apr 24To Balance b/d1,20,00031 Mar 25By Balance c/d1,20,000
1 Apr 25To Balance b/d1,20,00031 Mar 26By Balance c/d1,20,000
Dr.         Provision for Depreciation Account         Cr.
DateParticularsL.F.Amount (₹)DateParticularsL.F.Amount (₹)
31 Mar 24By Balance c/d20,00031 Mar 24By Depreciation A/c20,000
20,00020,000
31 Mar 25By Balance c/d40,0001 Apr 24By Balance b/d20,000
31 Mar 25By Depreciation A/c20,000
40,00040,000
31 Mar 26By Balance c/d60,0001 Apr 25By Balance b/d40,000
31 Mar 26By Depreciation A/c20,000
60,00060,000
Balance Sheet (31 March 2026): Machinery ₹1,20,000 − Provision for Depreciation ₹60,000 = Net Book Value ₹60,000. Asset stays at ₹1,20,000 always. Provision account accumulates year by year.

10. Asset Disposal Account (Sale of Asset)

When an asset is sold or discarded before or at end of useful life, we need to record the disposal. The Asset Disposal Account (or Asset A/c itself if Method A) is used to calculate and record the profit or loss on sale.

Profit on Sale: Sale Price > Book Value at date of sale
Loss on Sale: Sale Price < Book Value at date of sale
Profit on disposal → Cr. of P&L Account. Loss on disposal → Dr. of P&L Account.
📈 Asset Disposal — Worked Example
Machinery (original cost ₹1,20,000, Method B) sold on 31 March 2026 for ₹70,000. Provision for Depreciation accumulated = ₹60,000. Prepare Asset Disposal Account.

Journal entries for disposal under Method B:

DateParticularsL.F.Dr. (₹)Cr. (₹)
31 Mar 26Asset Disposal A/c    Dr.1,20,000
To Machinery A/c1,20,000
(Transfer of Machinery cost to Disposal A/c)
31 Mar 26Provision for Depreciation A/c    Dr.60,000
To Asset Disposal A/c60,000
(Transfer of accumulated depreciation to Disposal A/c)
31 Mar 26Bank A/c    Dr.70,000
To Asset Disposal A/c70,000
(Sale proceeds received)
31 Mar 26Asset Disposal A/c    Dr.10,000
To Profit & Loss A/c10,000
(Profit on disposal: ₹70,000 − Net Book Value ₹60,000 = ₹10,000 profit)
Verification: Asset Disposal A/c Dr. = ₹1,20,000 + ₹10,000 (profit) = ₹1,30,000. Asset Disposal A/c Cr. = ₹60,000 (provision) + ₹70,000 (sale) = ₹1,30,000. Balanced. Net Book Value = ₹1,20,000 − ₹60,000 = ₹60,000. Sold for ₹70,000. Profit = ₹10,000.
⚡ Quick Recall — Chapter 14 Depreciation Key Points
Depreciation = permanent, gradual, continuous decrease in fixed asset value. Non-cash expense charged to P&L Account every year. Land is NEVER depreciated. Only fixed tangible assets are depreciated. Intangible assets are amortised. Causes: wear & tear, obsolescence, passage of time, depletion, accidents, effluxion of time. Depreciable Amount = Cost − Residual (Scrap) Value. This is spread over useful life. SLM: Fixed amount each year = (Cost − Scrap) ÷ Life. Asset reaches scrap value at end. Equal charge on profit every year. WDV: Fixed % on book value each year. Amount decreases every year. Asset never becomes zero. Used by Income Tax Act. Method A (Charging to Asset): Depreciation A/c Dr. | To Asset A/c Cr. Asset shown at WDV. Simpler method. Method B (Provision): Depreciation A/c Dr. | To Provision for Depreciation A/c Cr. Asset stays at original cost. Provision accumulates. Profit on disposal = Sale Price − Book Value (positive). Loss on disposal = Book Value − Sale Price (if sold for less). Asset Disposal A/c: Dr. with Cost; Cr. with Provision + Sale Proceeds. Balancing figure = Profit (Cr. to P&L) or Loss (Dr. to P&L).
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20 MCQs — Depreciation

Mixed difficulty — meaning, causes, SLM vs WDV calculations, recording methods, disposal. Q17–Q20 are CUET-level numericals.

📚 Questions 1 to 20
1
Depreciation is the _____ decrease in the value of a fixed asset.
ATemporary
BPermanent, gradual and continuous
CSudden and unexpected
DReversible
Answer: B — Permanent, gradual and continuous. Depreciation is a permanent (not temporary), gradual (slow), and continuous (every period) decrease in asset value. It is not sudden, and once depreciated, the value does not return. This distinguishes depreciation from temporary falls in market value.
2
Which of the following assets is NOT depreciated?
AMachinery
BBuilding
CLand
DFurniture
Answer: C — Land. Land is not depreciated because it has an unlimited useful life — it does not wear out, become obsolete, or lose value due to use. All other fixed tangible assets (machinery, building, furniture, vehicles) are depreciated. Building is depreciated even though Land is not.
3
Depreciable Amount is calculated as:
ACost + Residual Value
BCost − Residual (Scrap) Value
CCost × Rate of Depreciation
DMarket Value − Cost
Answer: B — Cost − Residual Value. Depreciable Amount = Cost of Asset − Estimated Residual (Scrap) Value. This is the total amount that will be spread over the asset's useful life as depreciation. Higher residual value means lower depreciable amount.
4
Under Straight Line Method, the annual depreciation is:
AIncreasing each year
BDecreasing each year
CFixed and equal every year
DApplied on book value each year
Answer: C — Fixed and equal every year. SLM charges the same fixed amount of depreciation every year. Formula: (Cost − Scrap Value) ÷ Useful Life. This is why it is also called Fixed Instalment Method. Equal charge means equal impact on profit each year.
5
Under WDV Method, depreciation is calculated on:
AOriginal cost every year
BWritten Down Value (book value) at beginning of each year
CMarket value each year
DResidual value each year
Answer: B — WDV at beginning of each year. In WDV, a fixed % is applied on the book value (WDV) at the start of each year. Since WDV decreases every year, the depreciation amount also decreases. This is why it is also called Diminishing Balance Method.
6
Machinery cost ₹80,000. Scrap value ₹8,000. Useful life 8 years. Annual SLM depreciation is:
A₹10,000
B₹9,000
C₹8,000
D₹1,000
Answer: B — ₹9,000. SLM depreciation = (Cost − Scrap) ÷ Life = (₹80,000 − ₹8,000) ÷ 8 = ₹72,000 ÷ 8 = ₹9,000 per year. After 8 years, book value = ₹80,000 − (8 × ₹9,000) = ₹80,000 − ₹72,000 = ₹8,000 (= scrap value).
7
Machinery cost ₹1,00,000. WDV depreciation @10% p.a. Depreciation in Year 2 is:
A₹10,000
B₹9,000
C₹8,100
D₹10,900
Answer: B — ₹9,000. Year 1: 10% on ₹1,00,000 = ₹10,000. WDV end of Year 1 = ₹90,000. Year 2: 10% on ₹90,000 = ₹9,000. Under WDV, depreciation decreases each year because it is applied on the reducing book value.
8
Under Method A (Charging to Asset A/c), the journal entry for annual depreciation is:
AAsset A/c Dr. | To Depreciation A/c
BDepreciation A/c Dr. | To Asset A/c
CDepreciation A/c Dr. | To Provision for Depreciation A/c
DP&L A/c Dr. | To Asset A/c
Answer: B — Depreciation A/c Dr. | To Asset A/c Cr. Under Method A, depreciation is directly credited to the Asset A/c (reducing its book value). Depreciation A/c is then transferred to P&L A/c. Option C is for Method B (Provision method) where Asset A/c is not touched.
9
Under Method B (Provision for Depreciation A/c), the Asset A/c always shows:
AOriginal cost — not reduced each year
BBook value after deducting depreciation
CScrap value
DMarket value
Answer: A — Original cost always. Under Method B, the Asset A/c is never reduced. It always remains at original cost. The annual depreciation is credited to Provision for Depreciation A/c (a separate account). Net book value = Cost − Accumulated Provision shown in Balance Sheet.
10
Depreciation is a:
ACash expense — cash goes out when charged
BCapital expenditure
CNon-cash revenue expense — no cash outflow when charged
DCapital loss only
Answer: C — Non-cash revenue expense. Depreciation reduces profit (expense) but does NOT involve cash going out in the year of charging. The cash went when the asset was bought. This is why adding depreciation back to net profit gives operating cash flow in cash flow statements.
11
Under WDV Method, the asset value theoretically:
AReaches zero after useful life
BStays constant after 5 years
CNever becomes zero — decreases but never reaches zero
DIncreases in later years
Answer: C — Never becomes zero. Under WDV, since depreciation is a percentage of the remaining balance, and a percentage of any positive number gives a positive number, the asset value technically never reaches zero. This is a mathematical property of diminishing balance systems.
12
A machine becomes outdated because a newer, more efficient model is available. This cause of depreciation is called:
AWear and tear
BDepletion
CObsolescence
DEffluxion of time
Answer: C — Obsolescence. Obsolescence = asset loses economic usefulness due to newer technology or changing market conditions, even though it may still be physically working. Example: old fax machines, typewriters, first-generation computers. Wear and tear is physical deterioration from use.
13
Which method gives equal total charge (depreciation + repairs) on P&L Account across years?
AStraight Line Method
BWritten Down Value Method
CBoth give equal total charge
DNeither method considers repairs
Answer: B — WDV Method. Under WDV, depreciation is high in early years (when repairs are low) and low in later years (when repairs are high). The combined charge (depreciation + repairs) is thus more even across all years. Under SLM, equal depreciation + rising repairs = increasing total charge in later years.
14
When an asset is sold for more than its book value, the difference is:
ACharged as additional depreciation
BLoss on sale → Dr. to P&L A/c
CProfit on sale → Cr. to P&L A/c
DCredited to Asset A/c
Answer: C — Profit on sale → Cr. to P&L A/c. If Sale Price > Book Value = Profit on Disposal. This profit goes to Cr. side of P&L Account (income). If Sale Price < Book Value = Loss on Disposal, which goes to Dr. side of P&L Account (expense).
15
The journal entry to record depreciation under Method B is:
AAsset A/c Dr. | To Depreciation A/c
BDepreciation A/c Dr. | To Asset A/c
CDepreciation A/c Dr. | To Provision for Depreciation A/c
DP&L A/c Dr. | To Asset A/c
Answer: C — Depreciation A/c Dr. | To Provision for Depreciation A/c. Under Method B, depreciation is NOT credited to Asset A/c directly. It goes to Provision for Depreciation A/c (accumulated). Asset stays at cost. Then Depreciation A/c is closed to P&L A/c at year end.
16
Which accounting principle requires depreciation to be charged each period?
AMoney Measurement Principle
BGoing Concern Principle
CMatching Principle
DConservatism Principle
Answer: C — Matching Principle. The Matching Principle requires that expenses should be matched against the revenue they help generate in the same period. An asset helps generate revenue over its useful life, so its cost (depreciation) should be spread over that life — not charged entirely in one year.
17
CUET: Machine cost ₹2,00,000 on 1 April 2023. Scrap ₹20,000. Life 9 years. SLM. What is the book value on 31 March 2026 (after 3 years)?
A₹1,40,000
B₹1,40,000
C₹1,60,000
D₹1,80,000
Answer: B — ₹1,40,000. Annual SLM = (₹2,00,000 − ₹20,000) ÷ 9 = ₹1,80,000 ÷ 9 = ₹20,000 per year. After 3 years: total depreciation = 3 × ₹20,000 = ₹60,000. Book value = ₹2,00,000 − ₹60,000 = ₹1,40,000.
18
CUET: Machine cost ₹1,00,000 on 1 April 2024. WDV @10% p.a. What is WDV on 31 March 2027 (after 3 years)?
A₹70,000
B₹72,900
C₹72,900
D₹80,000
Answer: C — ₹72,900. Year 1: 10% on ₹1,00,000 = ₹10,000. WDV = ₹90,000. Year 2: 10% on ₹90,000 = ₹9,000. WDV = ₹81,000. Year 3: 10% on ₹81,000 = ₹8,100. WDV = ₹72,900. Alternative: ₹1,00,000 × (0.9)³ = ₹72,900.
19
CUET: Asset cost ₹1,50,000. Provision for Depreciation (accumulated) ₹90,000. Sold for ₹55,000. Profit or loss on disposal is:
AProfit ₹5,000
BLoss ₹95,000
CLoss ₹5,000
DProfit ₹55,000
Answer: C — Loss ₹5,000. Net Book Value = ₹1,50,000 − ₹90,000 = ₹60,000. Sold for ₹55,000. Since ₹55,000 < ₹60,000, there is a loss = ₹60,000 − ₹55,000 = ₹5,000. Loss on Disposal → Dr. to P&L Account.
20
CUET: Assertion (A): WDV Method gives more benefit to P&L Account in later years of asset life. Reason (R): Under WDV, depreciation amount decreases each year, so profit impact is lower in later years.
ABoth A and R are true, and R correctly explains A
BBoth A and R are true, but R does not explain A
CA is true; R is false
DA is false; R is true
Answer: A — Both true and R correctly explains A. A is correct: under WDV, depreciation falls each year, so less expense is charged in later years, meaning higher profit in later years. R is the correct reason: WDV depreciation decreases annually because it is applied on declining book value. R directly and fully explains A.

Chapter 14 — Live Quiz

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