Depreciation and Amortisation for CA Foundation
Why fixed assets are depreciated, the straight line and written down value methods, accounting with a provision for depreciation, disposal of assets and amortisation (AS 10 and AS 26).
AccountingPaper 112 MCQs2 lessons2 flashcards3 memory tricks
Practise Depreciation and Amortisation free
What you'll learn
- Methods of depreciation
Calculate depreciation by the straight line and written down value methods. - Provision for depreciation and disposal
Record depreciation through a provision account and work out profit or loss on sale.
Key formulas
| Depreciable amount | Cost − residual value |
|---|---|
| Straight line (SLM) | (Cost − residual value) ÷ useful life |
| SLM rate | Annual depreciation ÷ cost × 100 |
| Written down value (WDV) | Rate × opening book value |
| Depletion | Cost × (units extracted ÷ total units) |
Concepts explained
Straight line vs written down value
SLM charges an equal amount on cost every year; WDV charges a fixed rate on the opening book value, so the charge falls each year.
What it means
- SLM = (cost − residual value) ÷ useful life.
- WDV = rate × opening book value; the book value never reaches zero.
- SLM suits assets used evenly; WDV suits assets that lose value faster early on.
- Both allocate cost; neither values the asset at market price.
- Cost 1,00,000; residual 10,000; life 9 years
Answer: ₹10,000 a year
- Cost 50,000 at 10%
- Year 1: 5,000; year 2: 10% of 45,000
Answer: ₹4,500 in year 2
Related terms
- Useful life: period over which the asset is expected to be used
- Residual value: estimated amount at the end of useful life
Exam tip: WDV year 2 always uses the book value after year 1, never the original cost.
Provision for depreciation and sale of assets
With a provision account, the asset stays at cost and depreciation builds up in the provision. On sale, compare the price with book value.
What it means
- Depreciation A/c Dr; To Provision for Depreciation A/c.
- On sale: cost and accumulated depreciation go to an Asset Disposal account.
- Profit/loss = sale price − (cost − accumulated depreciation).
- Balance sheet shows cost less accumulated depreciation.
- Cost 80,000; accumulated depreciation 30,000; sold for 45,000
Answer: Loss ₹5,000
- Book value 20,000; sold for 24,000
Answer: Profit ₹4,000
Related terms
- Asset Disposal account: collects cost, depreciation and sale proceeds
- Part sale: only the sold part's cost and depreciation are removed
Exam tip: Always find book value first; the profit or loss follows in one step.
Nature of depreciation, amortisation and depletion
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. It is non-cash and isn't a valuation.
What it means
- Causes: wear and tear, passage of time, obsolescence, depletion.
- Freehold land isn't depreciated; buildings are.
- Intangibles are amortised (AS 26); mines and quarries are depleted.
- AS 10 (revised): change in method = change in estimate, applied prospectively.
- Purchased together for ₹50 lakh, land worth ₹20 lakh
Answer: Depreciate only ₹30 lakh (building)
- ₹10 lakh, useful life 5 years
Answer: Amortise ₹2 lakh a year
Related terms
- Obsolescence: loss of usefulness due to new technology
- Depreciable amount: cost minus residual value
Exam tip: Depreciation reduces profit but not cash, which is why it's added back in cash flow statements.
Memory tricks
SLM: equal charge on cost; WDV: fixed rate on reducing book value.
Tangible assets depreciate, wasting assets deplete, intangibles amortise.
Profit/loss on sale = sale price − (cost − accumulated depreciation).
Try 3 CA Foundation-style questions
Q1. Under the written down value method, depreciation is charged on
- the book value at the beginning of each year
- the original cost every year
- the residual value
- the market value of the asset
Show answer
Answer: (1) the book value at the beginning of each year
WDV applies a fixed rate to the opening book value, so the amount of depreciation falls each year.
Q2. A machine costing ₹50,000 is depreciated at 10% per annum by the written down value method. Depreciation for the second year is
- ₹5,000
- ₹4,500
- ₹4,050
- ₹9,500
Show answer
Answer: (2) ₹4,500
Year 1: 10% of 50,000 = 5,000; book value 45,000. Year 2: 10% of 45,000 = ₹4,500.
Q3. Under the straight line method, the depreciation charged each year is
- higher in later years
- lower in later years
- the same amount every year
- zero after the first year
Show answer
Answer: (3) the same amount every year
SLM spreads the depreciable amount (cost − residual value) equally over the useful life, so the charge is the same every year.
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