Depreciation Methods: Formulas + 20 Solved Examples

Depreciation Methods: Formulas + 20 Solved Examples

Author Bio

Vijaya Swaminathan, CA | 25+ years post-qualification experience  Connect on LinkedIn

Introduction: Why Depreciation Still Trips Up Finance Professionals

After two decades of reviewing financial statements across industries—from manufacturing giants to tech startups—I can tell you that depreciation remains one of the most misunderstood concepts in accounting.

It's not that people don't understand what depreciation is. The challenge lies in applying it correctly. Which method fits your asset? How do you handle partial-year calculations? What happens when residual value changes?

I've seen audit adjustments worth crores because someone applied the wrong depreciation method to a critical asset class. I've watched bright CA students stumble on exam questions that tested nothing more than careful formula application.

This guide isn't just theory—it's battle-tested knowledge from boardrooms, audit files, and yes, plenty of exam halls. If you're preparing for professional certifications or want to sharpen your practical skills, understanding double-entry accounting principles will strengthen your depreciation fundamentals.

What Is Depreciation? The Foundation

Depreciation is the systematic allocation of a depreciable asset's cost over its useful life. Simple definition, profound implications.

Think of it this way: when your company purchases machinery for ₹10,00,000 that will produce widgets for 10 years, it makes no sense to expense the entire amount in Year 1. The machinery delivers value across multiple accounting periods—so we match the expense accordingly.

For a deeper understanding of how assets flow through financial statements, explore our guide on what is a financial statement.

Key Components of Depreciation Calculation

The Four Primary Depreciation Methods

1. Straight Line Method (SLM)

The most intuitive approach—equal depreciation every year.

Formula:

Annual Depreciation = (Cost - Residual Value) ÷ Useful Life

Best suited for: Assets that provide consistent utility over time (furniture, buildings, office equipment).

2. Written Down Value Method (WDV) / Reducing Balance Method

Higher depreciation in early years, declining over time.

Formula:

Annual Depreciation = Opening Written Down Value × Depreciation Rate

Best suited for: Assets losing value rapidly initially (vehicles, technology equipment).

Rate Formula:

Rate = 1 - (Residual Value ÷ Cost)^(1/n) × 100

3. Units of Production Method

Depreciation based on actual usage, not time.

Formula:

Depreciation per Unit = (Cost - Residual Value) ÷ Total Estimated Units
Annual Depreciation = Depreciation per Unit × Units Produced

Best suited for: Manufacturing equipment, mining assets, delivery vehicles.

4. Sum of Years' Digits Method

Accelerated depreciation using a fraction-based approach.

Formula:

SYD = n(n+1) ÷ 2
Annual Depreciation = (Remaining Life ÷ SYD) × Depreciable Amount

Best suited for: Assets with higher productivity in early years.

20 Solved Problems: From Basic to Advanced

Problem 1: Basic Straight Line Calculation

Question: ABC Ltd purchases machinery for ₹5,00,000. Estimated useful life is 10 years with ₹50,000 residual value. Calculate annual depreciation using SLM.

Solution:

• Depreciable Amount = ₹5,00,000 - ₹50,000 = ₹4,50,000
• Annual Depreciation = ₹4,50,000 ÷ 10 = ₹45,000
• Depreciation Rate = (45,000 ÷ 5,00,000) × 100 = 9%

Problem 2: SLM with Partial Year

Question: Equipment purchased on October 1, 2024 for ₹2,40,000. Useful life 8 years, no residual value. Calculate depreciation for FY 2024-25 (ending March 31).

Solution:

• Annual Depreciation = ₹2,40,000 ÷ 8 = ₹30,000
• Months used = October to March = 6 months
• Depreciation for FY 2024-25 = ₹30,000 × (6/12) = ₹15,000

Problem 3: Written Down Value Method

Question: Plant costing ₹8,00,000 is depreciated at 15% WDV. Calculate depreciation for Years 1-3.

Solution:

Problem 4: Comparing SLM vs WDV

Question: Asset costs ₹10,00,000, useful life 5 years, residual value ₹1,00,000. Compare Year 1 depreciation under SLM (18%) and WDV (40%).

Solution:

• SLM: ₹10,00,000 × 18% = ₹1,80,000
• WDV: ₹10,00,000 × 40% = ₹4,00,000

WDV provides ₹2,20,000 higher deduction in Year 1—significant for tax planning!

Problem 5: Units of Production Method

Question: Mining equipment costs ₹12,00,000 with ₹2,00,000 salvage value. Estimated total extraction: 50,000 tonnes. Year 1 extraction: 8,000 tonnes. Calculate depreciation.

Solution:

• Depreciable Amount = ₹12,00,000 - ₹2,00,000 = ₹10,00,000
• Rate per tonne = ₹10,00,000 ÷ 50,000 = ₹20/tonne
• Year 1 Depreciation = 8,000 × ₹20 = ₹1,60,000

Problem 6: Sum of Years' Digits

Question: Asset costs ₹3,60,000 with 4-year life, no residual. Calculate Year 1 and Year 2 depreciation using SYD.

Solution:

• SYD = 4(4+1) ÷ 2 = 10
• Year 1: (4/10) × ₹3,60,000 = ₹1,44,000
• Year 2: (3/10) × ₹3,60,000 = ₹1,08,000

Problem 7: Journal Entry for Depreciation

Question: Record depreciation of ₹75,000 on office furniture.

Solution:

For comprehensive journal entry examples, explore our detailed guide with 100+ practical scenarios.

Problem 8: WDV Rate Calculation

Question: Determine WDV rate for asset costing ₹1,00,000 with ₹10,000 residual value over 5 years.

Solution:

Rate = [1 - (10,000/1,00,000)^(1/5)] × 100
Rate = [1 - (0.1)^0.2] × 100
Rate = [1 - 0.631] × 100
Rate = 36.9% ≈ **37%**

Problem 9: Asset Purchased Mid-Year (WDV)

Question: Vehicle purchased July 1, 2024 for ₹6,00,000. WDV rate 20%. Calculate depreciation for FY 2024-25 and 2025-26.

Solution:

FY 2024-25 (9 months):

• Full year = ₹6,00,000 × 20% = ₹1,20,000
• Actual = ₹1,20,000 × (9/12) = ₹90,000
• Closing WDV = ₹6,00,000 - ₹90,000 = ₹5,10,000

FY 2025-26:

• Depreciation = ₹5,10,000 × 20% = ₹1,02,000

Problem 10: Change in Useful Life Estimate

Question: Machine (cost ₹10,00,000) originally estimated for 10 years, depreciated 4 years at ₹90,000/year SLM. Remaining life now revised to 3 years. Calculate new annual depreciation.

Solution:

• Accumulated Depreciation = ₹90,000 × 4 = ₹3,60,000
• Carrying Amount = ₹10,00,000 - ₹3,60,000 = ₹6,40,000
• Remaining Life = 3 years
• New Annual Depreciation = ₹6,40,000 ÷ 3 = ₹2,13,333

Problem 11: Income Tax Approved Method (WDV)

Question: Company purchases computer for ₹1,50,000. Income Tax Act allows 40% WDV for computers. Calculate first 3 years' depreciation.

Solution:

The Indian Income Tax Act mandates WDV method with prescribed rates—this is what makes accounting interview questions on depreciation so practical!

Problem 12: Multiple Asset Depreciation

Question: Calculate total depreciation for the following assets using SLM:

Solution:

• Building: (₹50,00,000 - ₹5,00,000) ÷ 30 = ₹1,50,000
• Plant: (₹20,00,000 - ₹2,00,000) ÷ 15 = ₹1,20,000
• Furniture: (₹3,00,000 - ₹30,000) ÷ 9 = ₹30,000

Total Annual Depreciation = ₹3,00,000

Problem 13: Depreciation with Asset Addition

Question: Opening plant balance ₹15,00,000. New plant added August 1 for ₹6,00,000. Depreciation rate 10% SLM. Calculate total depreciation for year (April-March).

Solution:

• Opening Plant: ₹15,00,000 × 10% = ₹1,50,000
• New Plant (8 months): ₹6,00,000 × 10% × (8/12) = ₹40,000

Total Depreciation = ₹1,90,000

Problem 14: Units of Production - Variable Output

Question: Delivery truck costs ₹8,00,000, salvage ₹80,000. Estimated life: 2,00,000 km. Actual distances:

• Year 1: 45,000 km
• Year 2: 52,000 km
• Year 3: 38,000 km

Solution:

• Rate = (₹8,00,000 - ₹80,000) ÷ 2,00,000 = ₹3.60/km

Problem 15: Depreciation After Revaluation

Question: Building (original cost ₹20,00,000) revalued to ₹25,00,000 after 5 years. Remaining useful life 15 years. Calculate new annual depreciation.

Solution:

• New Depreciable Base = ₹25,00,000
• Remaining Life = 15 years
• Annual Depreciation = ₹25,00,000 ÷ 15 = ₹1,66,667

Problem 16: Double Declining Balance Method

Question: Equipment costs ₹4,00,000 with 5-year life and ₹40,000 residual value. Calculate depreciation for Years 1-3 using Double Declining Balance.

Solution:

• SLM Rate = 100% ÷ 5 = 20%
• DDB Rate = 20% × 2 = 40%

YearOpening ValueDepreciation @40%Closing Value

Note: In Year 4 or 5, switch to straight-line if needed to reach residual value without going below it.

Problem 17: Depreciation on Asset Sale

Question: Machine purchased April 1, 2022 for ₹5,00,000. Depreciation 10% SLM. Sold on September 30, 2024 for ₹3,20,000. Calculate profit/loss on sale.

Solution:

Step 1: Calculate Accumulated Depreciation

• FY 2022-23: ₹50,000 (full year)
• FY 2023-24: ₹50,000 (full year)
• FY 2024-25 (6 months): ₹25,000
• Total Accumulated = ₹1,25,000

Step 2: Calculate Written Down Value

• WDV on sale date = ₹5,00,000 - ₹1,25,000 = ₹3,75,000

Step 3: Determine Profit/Loss

• Sale Price - WDV = ₹3,20,000 - ₹3,75,000 = (₹55,000) Loss

Understanding how disposal entries flow into financial statements is crucial—review our bank reconciliation statement guide for related reconciliation concepts.

Problem 18: Component Depreciation (IFRS Approach)

Question: Aircraft purchased for ₹50,00,00,000 with the following components:

Calculate Year 1 total depreciation using component approach.

Solution:

This component approach under IFRS standards ensures each significant part with different useful lives is depreciated separately—a key concept for ACCA and CPA candidates!

Problem 19: Impairment and Revised Depreciation

Question: Machine (original cost ₹10,00,000) has accumulated depreciation of ₹4,00,000 after 4 years. An impairment review shows recoverable amount is only ₹5,00,000. Remaining useful life is 4 years. Calculate impairment loss and revised annual depreciation.

Solution:

Step 1: Calculate Current Carrying Amount

• Carrying Amount = ₹10,00,000 - ₹4,00,000 = ₹6,00,000

Step 2: Determine Impairment Loss

• Impairment Loss = Carrying Amount - Recoverable Amount
• Impairment Loss = ₹6,00,000 - ₹5,00,000 = ₹1,00,000

Step 3: Record Impairment Entry

Step 4: Calculate Revised Annual Depreciation

• New Carrying Amount = ₹5,00,000
• Remaining Life = 4 years
• Revised Annual Depreciation = ₹5,00,000 ÷ 4 = ₹1,25,000

Problem 20: Comprehensive Problem - Full Asset Lifecycle

Question: XYZ Manufacturing purchases specialized equipment on April 1, 2022:

• Purchase price: ₹15,00,000
• Installation & testing costs: ₹1,00,000
• Estimated useful life: 8 years
• Residual value: ₹2,00,000
• Method: Straight Line
• Major overhaul on April 1, 2025: ₹2,40,000 (extends useful life by 2 additional years)
• Asset sold on March 31, 2028 for ₹6,50,000

Calculate depreciation for each year and profit/loss on final disposal.

Solution:

Initial Setup (April 1, 2022):

• Total Capitalized Cost = ₹15,00,000 + ₹1,00,000 = ₹16,00,000
• Depreciable Amount = ₹16,00,000 - ₹2,00,000 = ₹14,00,000
• Original Annual Depreciation = ₹14,00,000 ÷ 8 = ₹1,75,000

Years 1-3 Depreciation (FY 2022-23 to 2024-25):

After Major Overhaul (April 1, 2025):

• WDV before overhaul = ₹10,75,000
• Add: Overhaul cost capitalized = ₹2,40,000
• New Carrying Amount = ₹13,15,000
• Original remaining life = 8 - 3 = 5 years
• Extended life = 5 + 2 = 7 years
• Residual Value = ₹2,00,000 (unchanged)
• Revised Annual Depreciation = (₹13,15,000 - ₹2,00,000) ÷ 7 = ₹1,59,286

Years 4-6 Depreciation (FY 2025-26 to 2027-28):

Disposal Calculation (March 31, 2028):

• WDV at disposal = ₹8,37,142
• Sale proceeds = ₹6,50,000
• Loss on Sale = ₹8,37,142 - ₹6,50,000 = ₹1,87,142

Final Disposal Entry:

For mastering such lifecycle calculations, our accounting terms dictionary provides quick reference for all related terminology.

Summary Table: Depreciation Methods Comparison

Depreciation Under Different Regulatory Frameworks

Companies Act, 2013 (India)

Under Schedule II of the Companies Act:

• Useful lives are prescribed for different asset categories
• Both SLM and WDV methods are permitted
• Component depreciation is mandatory for assets with significant parts having different useful lives
• Residual value cannot exceed 5% of original cost unless justified

Income Tax Act, 1961 (India)

Key provisions for tax depreciation:

• WDV method is mandatory for computing taxable income
• Assets are grouped into "blocks" with prescribed rates
• Key rates: Computers (40%), Plant & Machinery (15%), Furniture (10%), Buildings (10%)
• Additional depreciation of 20% available for new manufacturing plant
• If asset used for less than 180 days, only 50% depreciation allowed in first year

For professionals pursuing global certifications, understanding these differences is essential—explore our ACCA Financial Reporting guide for exam-focused preparation.

IFRS (IAS 16 - Property, Plant & Equipment)

International standards require:

• Depreciation method should reflect the pattern of economic benefit consumption
• Annual review of useful life, residual value, and depreciation method
• Component depreciation for significant parts
• Revaluation model available as alternative to cost model

Frequently Asked Questions

1. How to calculate depreciation rate in WDV method?

To calculate the Written Down Value (WDV) depreciation rate when you know the asset's cost, residual value, and useful life, use this formula:

Rate = [1 - (Residual Value ÷ Cost)^(1/n)] × 100

Where n = useful life in years.

Worked Example:

Asset costs ₹5,00,000 with ₹50,000 residual value over 8 years:

Rate = [1 - (50,000/5,00,000)^(1/8)] × 100
Rate = [1 - (0.1)^0.125] × 100
Rate = [1 - 0.749] × 100 
Rate = 25.1%

This rate is then applied to the opening written down value each year—not the original cost. So Year 1 depreciation = ₹5,00,000 × 25.1% = ₹1,25,500, and Year 2 depreciation = ₹3,74,500 × 25.1% = ₹94,000, and so on.

2. Which is not a method of calculating depreciation?

Several accounting concepts are commonly confused with depreciation methods:

Legitimate depreciation methods are: Straight Line (SLM), Written Down Value (WDV), Units of Production, Sum of Years' Digits (SYD), and Double Declining Balance (DDB).

3. What is the difference between SLM and WDV method of depreciation?

Here's a comprehensive comparison:

When to choose SLM: Assets providing uniform benefit throughout life (buildings, fixtures).

When to choose WDV: Assets losing efficiency or value rapidly in early years (vehicles, electronics, machinery).

4. What is reducing balance method of depreciation with example?

The Reducing Balance Method (also called Written Down Value, Diminishing Balance, or Declining Balance) charges depreciation as a fixed percentage of the asset's book value at the beginning of each period—not its original cost.

Complete Worked Example:

Machine purchased for ₹2,00,000, depreciated at 25% reducing balance over 5 years:

Key observations:

• Total depreciation over 5 years = ₹1,52,539
• Book value never reaches zero (unlike SLM)
• Year 1 depreciation (₹50,000) is more than 3× Year 5 (₹15,820)

This pattern reflects reality for assets like vehicles that lose 20-30% of value in Year 1 but depreciate more slowly thereafter.

5. How many methods of depreciation are there in accounting?

There are five primary depreciation methods recognized globally:

Primary Methods:

1. Straight Line Method (SLM) - Equal annual depreciation; simplest and most common
2. Written Down Value/Reducing Balance - Fixed rate on decreasing book value
3. Units of Production/Activity Method - Based on actual output or usage hours
4. Sum of Years' Digits (SYD) - Accelerated method using declining fractions
5. Double Declining Balance (DDB) - Twice the straight-line rate on book value

Specialized Variations:

• Component Depreciation - IFRS requirement to depreciate significant parts separately
• Group/Composite Depreciation - Single rate for pools of similar assets
• Retirement Method - Expense recognized only when asset retired (utilities)
• Replacement Method - Expense equals replacement cost (railways, public utilities)
• Annuity Method - Considers interest on capital invested (rarely used)
• Sinking Fund Method - Includes investment accumulation for replacement

Regulatory Context:

• Indian Income Tax Act: Only WDV permitted
• Companies Act 2013: SLM or WDV permitted
• IFRS/IAS 16: Method must reflect pattern of economic benefit consumption

6. What is sinking fund method of depreciation?

The Sinking Fund Method (also called Depreciation Fund Method) is a specialized approach where the company not only charges depreciation but also invests an equivalent amount in interest-bearing securities to accumulate funds for asset replacement.

How It Works:

1. Calculate the annual contribution needed (using sinking fund tables or present value formulas)
2. Charge this amount as depreciation expense
3. Invest the same amount in approved securities
4. Interest earned is credited to the sinking fund
5. At asset's end of life, liquidate investments to fund replacement

Example:

• Asset cost: ₹10,00,000
• Useful life: 5 years
• Expected fund interest rate: 8%
• Sinking fund factor for 5 years @ 8% = 0.17046

Annual deposit required: ₹10,00,000 × 0.17046 = ₹1,70,460

Advantages: Ensures replacement funds are physically available; conservative approach.

Disadvantages: Complex administration; requires external investment management; opportunity cost if company's return exceeds fund rate; rarely used in modern practice.

7. What is revaluation method of depreciation?

The Revaluation Method calculates depreciation by comparing an asset's professionally assessed value at the beginning and end of each accounting period. Unlike other methods, it doesn't use formulas based on cost and life.

Formula:

Depreciation = Opening Value + Additions During Year - Closing Value

Best Used For:

• Loose tools and small implements
• Livestock and poultry
• Containers, barrels, and crates
• Laboratory equipment and glassware
• Items too numerous to track individually

Worked Example:

Key Characteristics:

• Captures wear, tear, loss, theft, and obsolescence in one figure
• Requires physical verification and valuation at each period-end
• Subjective element in determining closing value
• Not suitable for high-value individual assets
• Simple for assets that are difficult to track piece by piece

Journal Entry:

Depreciation A/c          Dr. 32,000
    To Loose Tools A/c              32,000

8. What is depletion method of depreciation?

Depletion is frequently confused with depreciation, but it's a distinct concept that applies exclusively to natural resources (also called wasting assets). While depreciation allocates the cost of manufactured assets, depletion allocates the cost of extracting irreplaceable natural resources.

Applies To:

• Mineral mines (coal, iron ore, gold, copper)
• Oil and gas reserves
• Timber forests and plantations
• Stone quarries
• Fisheries with limited stock

Formula:

Depletion Rate per Unit = (Acquisition Cost + Development Costs - Residual Value) ÷ Total Estimated Recoverable Units

Annual Depletion = Depletion Rate × Units Extracted in Period

Comprehensive Example:

A company acquires coal mining rights:

• Purchase price: ₹8,00,00,000
• Development costs: ₹2,00,00,000
• Estimated residual (land value after mining): ₹50,00,000
• Total estimated coal reserves: 50,00,000 tonnes
• Year 1 extraction: 4,00,000 tonnes

Calculation:

Depletion rate = (8,00,00,000 + 2,00,00,000 - 50,00,000) ÷ 50,00,000
Depletion rate = 9,50,00,000 ÷ 50,00,000 = ₹19 per tonne

Year 1 Depletion = 4,00,000 × ₹19 = ₹76,00,000

Key Differences from Depreciation:

Depreciation Journal Entries: Quick Reference

1. Recording Annual Depreciation

2. Asset Disposal at Profit

3. Asset Disposal at Loss

4. Revaluation Increase (IFRS)

For comprehensive journal entry practice, explore our 100+ journal entry examples guide.

Practical Tips for Exam Success

For CA/CPA/ACCA Students:

1. Memorize the formulas - SLM, WDV rate calculation, and SYD are frequently tested
2. Practice partial-year calculations - Examiners love mid-year purchases and sales
3. Know the differences - Tax depreciation vs. book depreciation creates deferred tax
4. Component depreciation - Essential for IFRS-based exams
5. Show all workings - Partial marks are awarded for correct methodology

For Working Professionals:

1. Document your assumptions - Useful life estimates need justification for auditors
2. Maintain asset registers - Track individual assets, not just categories
3. Review annually - Impairment indicators require testing
4. Coordinate with tax team - Ensure consistency in block asset calculations

Key Takeaways

• ✅ Choose the right method - Match depreciation pattern to how the asset delivers economic benefit
• ✅ Document thoroughly - Maintain records of cost, useful life estimates, and any changes
• ✅ Review annually - IFRS requires reassessment of useful life, residual value, and method each year
• ✅ Understand tax implications - WDV is mandatory for Indian income tax; different methods create timing differences
• ✅ Master component depreciation - Required under IFRS for significant parts with different lives
• ✅ Practice disposal calculations - Profit/loss on sale appears in almost every professional exam

Closing Remarks

After 25 years of working with depreciation calculations across industries—from manufacturing giants to tech startups, from audit rooms to boardrooms—I can tell you this: the numbers tell a story. Every depreciation method you choose affects how stakeholders perceive your company's financial health.

A well-considered depreciation policy isn't just about compliance. It balances accurate expense recognition with practical tax planning. It reflects management's understanding of how assets truly deliver value. And it communicates transparency to investors, lenders, and regulators.

For students preparing for CA, CPA, ACCA, or CMA exams, mastering these 20 problems gives you a rock-solid foundation. But don't stop here—practice with variations, question the assumptions, and understand why each method exists. The basics of accounting will always serve you well, but it's the nuanced application that separates good accountants from great ones.

For professionals, remember that depreciation isn't just a number-crunching exercise. It's a strategic tool that impacts everything from profitability ratios to capital budgeting decisions. Choose your methods thoughtfully, document your reasoning clearly, and review your estimates regularly.

The principles remain constant across decades and jurisdictions: understand the asset, choose the appropriate method, calculate with precision, and always—always—show your working.

Keep learning. Keep questioning. And remember: in accounting, there's no substitute for practice.

Further Reading

For continued learning on related topics, explore these resources on Eduyush:

• Journal Entries Guide: 100+ Examples
• Bank Reconciliation Statement: Complete Guide
• Double Entry Accounting Explained
• What is a Financial Statement?
• Accounting Interview Questions
• IFRS 18 vs IAS 1: Key Differences

External Resource: For authoritative guidance on depreciation under international standards, including IAS 16 and IAS 36 (Impairment), visit ACCA Global's Technical Resources