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Accounting for Depreciation: Different Methods

This document explains the accounting entries for depreciation under different methods: Straight Line, Written Down Value (WDV), WDV transitioning to Straight Line (WDV-SL), and Sum of the Years' Digits (SYD).

Scenario:

  • Machine Cost: ₹10,00,000
  • Useful Life: 10 years (used for 12 years before disposal)

1. Straight Line Method

  • Depreciation Rate: 10% per year

Accounting Entries:

  • Purchase of Machine:

    Account Debit (₹) Credit (₹)
    Machine 10,00,000
    Cash/Bank 10,00,000

  • Depreciation (Years 1-10): (Repeated annually)

    Account Debit (₹) Credit (₹)
    Depreciation Expense 1,00,000
    Accumulated Depreciation 1,00,000

  • Years 11 & 12: No depreciation is recorded as the asset is fully depreciated.

  • Sale of Machine (End of Year 12): Sale Price: ₹50,000

    Account Debit (₹) Credit (₹)
    Machine 10,00,000
    Accumulated Depreciation 10,00,000
    Cash/Bank 50,000
    Profit on Sale of Machine 50,000

Explanation:

  • Annual Depreciation: (₹10,00,000 / 10 years) = ₹1,00,000
  • At the end of year 10, accumulated depreciation is ₹10,00,000, resulting in a book value of ₹0.
  • The sale at ₹50,000 results in a profit of ₹50,000.

2. Written Down Value (WDV) Method

  • Depreciation Rate: 20% per year

Accounting Entries:

  • Purchase of Machine: (Same as Straight Line)

  • Depreciation (Years 1-12):

Year Beginning Book Value (₹) Depreciation (₹) Ending Book Value (₹)
1 10,00,000 2,00,000 8,00,000
2 8,00,000 1,60,000 6,40,000
3 6,40,000 1,28,000 5,12,000
4 5,12,000 1,02,400 4,09,600
5 4,09,600 81,920 3,27,680
6 3,27,680 65,536 2,62,144
7 2,62,144 52,429 2,09,715
8 2,09,715 41,943 1,67,772
9 1,67,772 33,554 1,34,218
10 1,34,218 26,844 1,07,374
11 1,07,374 21,475 85,899
12 85,899 17,180 68,719

  • Sale of Machine (End of Year 12): Sale Price: ₹50,000

    Account Debit (₹) Credit (₹)
    Machine 10,00,000
    Accumulated Depreciation 9,31,281
    Cash/Bank 50,000
    Loss on Sale of Machine 18,719

Explanation:

  • Depreciation is calculated on the reducing book value each year.
  • At the end of year 12, the book value is ₹68,719.
  • The sale at ₹50,000 results in a loss of ₹18,719.

3. WDV Transitioning to Straight Line (WDV-SL)

  • Initial Depreciation Rate: 20% (WDV)
  • Switch to Straight Line when annual depreciation under WDV falls below the equivalent straight-line depreciation (₹1,00,000).

Accounting Entries:

  • Purchase of Machine: (Same as previous methods)

  • Depreciation (Years 1-4): (WDV Method) (Same as first four years of WDV method)

  • Year 5 Onwards: Switch to straight line method. The remaining book value is divided by the remaining useful life.

Year Beginning Book Value (₹) Depreciation (₹) Ending Book Value (₹) Method
1 10,00,000 2,00,000 8,00,000 WDV
2 8,00,000 1,60,000 6,40,000 WDV
3 6,40,000 1,28,000 5,12,000 WDV
4 5,12,000 1,02,400 4,09,600 WDV
5 4,09,600 68,267 3,41,333 SLM
6 3,41,333 68,267 2,73,066 SLM
7 2,73,066 68,267 2,04,799 SLM
8 2,04,799 68,267 1,36,532 SLM
9 1,36,532 68,267 68,265 SLM
10 68,265 68,265 0 SLM

  • Sale of Machine (End of Year 12): Sale Price: ₹50,000

    Account Debit (₹) Credit (₹)
    Machine 10,00,000
    Accumulated Depreciation 10,00,000
    Cash/Bank 50,000
    Profit on Sale of Machine 50,000