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Accounting 3% exam weight

Depreciation

Part of the CMA Foundation study roadmap. Accounting topic accoun-005 of Accounting.

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Depreciation

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam. Depreciation is the systematic allocation of the depreciable amount of a tangible asset over its estimated useful life. The depreciable amount is Cost − Residual (Salvage) Value. Under the Straight-Line Method (SLM), depreciation is equal every year: (Cost − Residual Value) ÷ Useful Life (in years). Under the Written Down Value (WDV) method, depreciation is calculated on the diminishing book value at the prescribed rate. Land is never depreciated because its useful life is unlimited. Asset cost is split between land and building when both are bought together, and depreciation starts only when the asset is available for intended use. For CMA Foundation, expect a 4–8 mark SLM/WDV table, part-year depreciation, and one conceptual MCQ on AS 10 / Ind AS 16.

🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Core Definition and Components

As per AS 10 and Ind AS 16, depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Three components drive every calculation:

TermMeaning
CostPurchase price + directly attributable cost to bring the asset to working condition
Residual ValueEstimated net realisable value at the end of useful life
Useful LifePeriod over which the asset is expected to be used by the entity
Depreciable AmountCost − Residual Value

Straight-Line Method (SLM)

Depreciation is uniform across years:

Annual Depreciation = (Cost − Residual Value) ÷ Useful Life (years)

SLM Rate (%) = (1 ÷ Useful Life) × 100

When an asset is purchased partway through the year, depreciation is charged pro-rata from the date the asset is available for use until the year-end balance-sheet date.

Written Down Value (WDV) Method

Depreciation is charged on the opening book value each year, so the charge is higher in the early years and lower later — producing an accelerated pattern.

Depreciation for the Year = WDV at the beginning of the year × Depreciation Rate

WDV Rate (%) = (1 ÷ Useful Life) × 100, or the rate prescribed under the Companies Act, 2013 / Income Tax Act.

Recognition Rules

  1. Depreciation begins when the asset is available for intended use, not on the date of purchase order.
  2. Land has an unlimited useful life and is not depreciated. If land and building are acquired jointly, the cost must be split.
  3. Method must be applied consistently and reviewed at least annually.

Common Exam Patterns

  • Prepare an SLM or WDV depreciation schedule with disposal.
  • Calculate depreciation for part of a year using months.
  • Identify which items qualify as Property, Plant & Equipment (PP&E).

🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Method Comparison and Linkage

The WDV depreciation rate for a given useful life is materially higher than the SLM rate — for a 5-year asset, SLM rate is 20% while the equivalent WDV rate is roughly 31.6% (because WDV never reaches zero unless the rate tends to infinity). This is why WDV method front-loads the expense. In a CMA problem, students often swap the WDV rate where the SLM rate should go, producing inflated figures.

Worked Mini-Example

A machine is purchased on 1 July 2025 for ₹2,00,000 with residual value ₹20,000 and useful life 4 years. SLM depreciation for the year ended 31 March 2026 = (₹2,00,000 − ₹20,000) ÷ 4 × (9 ÷ 12) = ₹33,750.

Common Mistakes

  1. Adding depreciation already charged to current year depreciation instead of applying the WDV formula on the opening balance.
  2. Treating depreciation as a cash outflow in cash-flow statements — it is a non-cash expense; only the working-capital adjustments matter.
  3. Switching method mid-life and re-computing prior years — under AS 10, a method change is a change in accounting estimate and is applied prospectively, not retrospectively.
  4. Depreciating land, or forgetting pro-rata treatment for purchase/disposal year.

Practice Prompts

  • Prepare a 4-year WDV schedule at 20% for an asset costing ₹1,00,000, then record disposal of the asset at the end of year 3 for ₹45,000.
  • A factory is bought for ₹50,00,000 inclusive of land valued at ₹10,00,000. Building useful life = 25 years. Calculate first-year SLM depreciation.

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