The systematic approaches used to allocate the cost of a tangible asset over its useful life.
Depreciation methods determine how quickly an asset's cost is expensed. The choice affects reported profits, tax liability, and asset values on the balance sheet. Main methods: Straight-Line (equal annual amount), Written-Down Value/Declining Balance (higher early depreciation), Units of Production (based on actual usage), and Sum-of-Years-Digits (accelerated). India's Companies Act prescribes useful lives and allows SLM or WDV. Income Tax Act mandates WDV with specified rates. The method chosen should reflect the pattern in which the asset's economic benefits are consumed.
Machine cost: ₹10,00,000, Salvage: ₹1,00,000, Life: 5 years. SLM: ₹1,80,000/year (equal). WDV at 40%: Year 1: ₹4,00,000, Year 2: ₹2,40,000, Year 3: ₹1,44,000 (decreasing). SLM gives stable profits; WDV gives higher early deductions (better for tax planning).
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Written-Down Value (WDV) is mandatory under the Income Tax Act (Section 32) for computing taxable income. WDV gives higher depreciation in early years, reducing tax liability upfront. However, for financial reporting under Companies Act, you can choose SLM or WDV based on the asset's usage pattern.
Yes, but it's treated as a change in accounting estimate under Ind AS 8. The change must be justified (e.g., changed usage pattern), applied prospectively (not retrospectively), and disclosed in financial statements with the impact quantified.
The systematic allocation of the cost of a tangible asset over its useful life, representing the decline in value due to wear, use, or obsolescence.
A depreciation method that allocates an equal amount of an asset's cost as expense in each period of its useful life.
The estimated value of an asset at the end of its useful life, representing what it could be sold for after depreciation is complete.
Long-term tangible assets owned by a business that are used in operations and not intended for sale, such as land, buildings, machinery, vehicles, and equipment.
A table showing the systematic allocation of a fixed asset's cost over its useful life, detailing annual depreciation expense and book value.
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