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CA Foundation · Accounting

Depreciation and Amortisation for CA Foundation Accounting

Depreciation is the systematic allocation of a depreciable asset's cost, less residual value, over its useful life. Amortisation is the same idea for intangible assets. To solve questions, find the depreciable amount, apply the stated method (SLM or WDV) for the correct period, then pass the journal entries and prepare the asset account.

What this chapter covers

This chapter explains how the cost of a fixed asset is charged to the profit and loss account over the years it is used, instead of all in the year of purchase. You learn the main methods, mainly Straight Line Method (SLM) and Written Down Value (WDV), and how to handle part-year purchases, sales and changes of method. The last topic covers amortisation of intangible assets such as patents, copyrights and software under AS 26 basics.

The chapter is mostly calculation plus journal entries and ledger accounts. Each question usually asks you to compute depreciation for several years, then show the Asset Account, the Provision for Depreciation Account or the Profit and Loss charge. Get the format right and the numbers follow.

It links to other parts of the paper. Depreciation is a core adjustment in final accounts, so it appears in the trial balance adjustments you will see in Financial Statements. Mastering it here makes that chapter faster.

Depreciation is a high-use chapter because the same skill is needed in final accounts and other chapters, so one solid grasp pays off many times. Questions are formula-driven with a clear working format, which means step marks are easy to earn if your layout is neat. Accounting has no negative marking, so a full attempt with correct workings and entries can protect your marks even when a final figure slips. Students who practise it well also gain speed for the long final-accounts problems.

Depreciation and Amortisation: topics in the order to study them

  1. 1Meaning and Features of DepreciationStart here to learn the terms: cost, residual value, useful life and depreciable amount, which every later formula uses.
  2. 2Straight Line Method of DepreciationIt is the simplest method, with equal depreciation each year, so it builds your base format for journal entries and ledgers.
  3. 3Written Down Value Method of DepreciationLearn it right after SLM so you can compare the two: WDV applies a fixed rate on the reducing book value.
  4. 4Other Methods of DepreciationThese are variations on the same idea, so they are easier once SLM and WDV are clear.
  5. 5Depreciation on Additions, Sales and Disposal of AssetsThis brings in part-year calculations and profit or loss on sale, which is where most exam questions get tricky.
  6. 6Change in Method of DepreciationA change of method is treated as a change in accounting policy. It needs you to be confident with both methods and with asset accounts before you recalculate past depreciation from the date of first use.
  7. 7Amortisation of Intangible Assets and AS 26 BasicsFinish with intangibles, which reuse the same logic under different names and a few specific rules.

How to prepare Depreciation and Amortisation

Treat this chapter as a skill to practise, not a theory to read. Build one working format and use it on every question.

  1. Write the key terms in your own words: cost, residual value, useful life, depreciable amount, book value.
  2. Learn the SLM formula: Annual depreciation = (Cost − Residual value) ÷ Useful life. Then learn WDV: Depreciation = Rate × Opening book value.
  3. Practise the journal entries for purchase, depreciation charged and sale until you can write them without looking.
  4. Solve questions on a fixed layout: write the date, compute depreciation for each year in a small table, then draw the Asset Account.
  5. For part-year questions, always pause and check the date of purchase or sale and compute depreciation for the exact number of months, unless the question says otherwise.
  6. Do change-of-method questions last, and write clearly which years are recalculated and what the difference is.
  7. Before the exam, solve at least two full past-style problems under a timer and check that every entry has a narration and a clear heading.

Common mistakes in Depreciation and Amortisation

  • Forgetting to deduct residual value in SLM.

    Fix: Underline residual value when you read the question and write the depreciable amount as the first line of working.

  • Applying the WDV rate on original cost every year.

    Fix: Make a small table with opening value, depreciation and closing value for each year, and use the closing value as next year's opening.

  • Charging a full year of depreciation on a mid-year purchase or sale.

    Fix: Write the number of months held beside each asset before computing, and calculate depreciation as annual amount × months ÷ 12.

  • Calculating profit or loss on sale using original cost.

    Fix: Compute the book value at the sale date, then compare it with the sale price.

  • Recalculating depreciation under the new method only from the current year when the method changes.

    Fix: Treat the change as a change in accounting policy. Recompute depreciation under the new method from the date the asset was first used, then find the difference from what was already charged and adjust it in the year of change, with disclosure.

  • Leaving out narrations and ledger headings.

    Fix: Add a short narration to each journal entry and label every account with its full name and the correct Dr and Cr sides.

Last-day revision: Depreciation and Amortisation

  • Depreciable amount = Cost − Residual value.
  • SLM depreciation = (Cost − Residual value) ÷ Useful life, equal every year.
  • WDV depreciation = Rate × book value at the start of the year, so it falls each year.
  • Under WDV the book value reduces each year but theoretically never reaches zero.
  • Cost includes purchase price plus costs to bring the asset to working condition, such as freight and installation.
  • For part-year use, depreciation is charged for the months the asset was held, unless the question says otherwise.
  • Profit or loss on sale = Sale price − Book value at the date of sale.
  • Depreciation is a non-cash expense charged to the Profit and Loss Account.
  • A change of method is treated as a change in accounting policy. Depreciation is recalculated from the date of first use, and the difference is adjusted in the year of change, with disclosure.
  • Amortisation is the depreciation of an intangible asset over its useful life.
  • Check whether the question uses a Provision for Depreciation Account or reduces the asset directly.
  • Always show workings: marks are given for steps, not only the final answer.

Depreciation and Amortisation practice questions

Depreciation and Amortisation: frequently asked questions

What is the difference between depreciation and amortisation?

Depreciation applies to tangible assets such as machinery and buildings. Amortisation applies to intangible assets such as patents and software. The idea is the same: spread the cost over the useful life.

Which is easier for exams, SLM or WDV?

SLM is simpler because the amount is the same each year. WDV needs a year-wise table, so it takes more time. Practise both, since questions often ask you to use or compare them.

How should I handle an asset bought during the year?

Find the exact date of purchase and count the months the asset was used in that year. Charge depreciation for those months only, unless the question gives a different instruction.

Do I need to memorise AS 26 in detail?

At Foundation level, you need the basics: what an intangible asset is, how it is recognised at cost and how it is amortised over its useful life. Focus on simple amortisation calculations and entries.