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CMA Foundation · Fundamentals of Financial and Cost Accounting

Depreciation: Straight Line and Diminishing Balance Methods

Depreciation is the systematic allocation of the cost of a fixed asset, less its residual value, over its useful life. Under the straight line method the charge is equal every year. Under the diminishing balance method a fixed percentage is applied to the opening book value each year. Master the formulas, then practise the entries.

What this chapter covers

This chapter explains how a business spreads the cost of a fixed asset over the years it is used. You learn why assets lose value, what decides the yearly charge, and how to calculate it by the straight line method (SLM) and the diminishing balance method (also called written down value, WDV). You also learn the journal entries and what happens when a business changes its method.

The maths is simple, but the questions are built to trap hasty readers. Part-year purchases, sales of assets during the year, residual value and the base on which the rate is applied all change the answer. Good marks come from reading the data carefully and following a fixed routine.

The chapter connects to many other parts of Paper 2. Depreciation is an expense in the profit and loss account, and the asset appears at book value in the balance sheet. It links to journal entries, ledger accounts, final accounts, adjustments and the accounting concepts such as matching and going concern. Cost accounting also uses depreciation as an overhead, so a firm grasp here helps twice.

Depreciation is a favourite for objective papers because one short numerical tests formula, rate, time and book value together. With 50 MCQs in one hour and no negative marking, these are quick, scoring questions if your method is clean. The same skill also supports questions in final accounts and adjustments, so effort here pays off beyond this chapter. Since you need at least 40% in each paper, reliable numerical chapters like this one help you stay safely above the line.

Depreciation (Straight Line and Diminishing Balance Methods): topics in the order to study them

  1. 1Meaning and Causes of DepreciationStart with the idea itself, since every later formula rests on knowing what depreciation is and why it is charged.
  2. 2Factors Affecting Depreciation and AS 6 BasicsNext learn the inputs, namely cost, residual value and useful life, because each formula uses them.
  3. 3Straight Line Method of DepreciationThis is the simplest method, so learn it before the one that changes every year.
  4. 4Diminishing Balance Method of DepreciationStudy it after SLM so you can compare the two and see why charges fall year by year.
  5. 5Accounting Entries and Change in Depreciation MethodFinish with the entries and method changes, which need both calculations to be clear first.

How to prepare Depreciation (Straight Line and Diminishing Balance Methods)

Treat this chapter as a short theory base plus a numerical routine. Aim to solve a typical question in under a minute and a half.

  1. Read the meaning, causes and AS 6 basics once, and note the key terms: cost, residual value, useful life, depreciable amount and book value.
  2. Learn the SLM formula: Annual depreciation = (Cost − Residual value) ÷ Useful life. Practise ten simple problems, including part-year purchases.
  3. Learn the WDV formula: Depreciation = Rate % × Opening book value. Practise until you remember that the base falls every year and residual value is not deducted before applying the rate.
  4. Solve the same data by both methods and compare the year 1, year 2 and year 3 charges. This fixes the difference in your mind.
  5. Practise the entries: charging depreciation, and the effect of selling an asset during the year. Write the debit and credit side by side.
  6. Work through method-change questions slowly, noting from which date the new method applies and what book value it starts from.
  7. Do timed MCQ sets. Eliminate options that break basic logic, such as a WDV charge that stays the same each year or a book value that exceeds cost.

Common mistakes in Depreciation (Straight Line and Diminishing Balance Methods)

  • Applying the WDV rate to original cost every year

    Fix: Write the opening book value at the start of every year and apply the rate only to that figure.

  • Forgetting to deduct residual value under SLM

    Fix: Underline cost, residual value and life before calculating, and write (Cost − Residual value) first.

  • Leaving out installation and freight from the cost of the asset

    Fix: Add every expense needed to get the asset ready for use, but exclude later repairs and routine maintenance.

  • Ignoring the date of purchase or sale

    Fix: Check the date given and charge for the months the asset was actually used, unless the question states a different convention.

  • Confusing book value with accumulated depreciation

    Fix: Remember that book value is what remains and accumulated depreciation is what has been charged; the two add up to cost.

  • Mixing up the two methods when the question names one

    Fix: Learn the names as one group, and read the method in the question before starting any working.

Last-day revision: Depreciation (Straight Line and Diminishing Balance Methods)

  • Depreciation allocates cost less residual value over the useful life; it is not a fund and not a valuation exercise.
  • Causes include wear and tear, passage of time, obsolescence and exhaustion.
  • Depreciable amount = Cost − Residual value.
  • SLM: Annual depreciation = (Cost − Residual value) ÷ Useful life; the charge is equal each year.
  • SLM rate on cost = Annual depreciation ÷ Cost × 100.
  • WDV: Depreciation = Rate % × Opening book value, so the charge falls every year.
  • Under WDV the asset never reaches zero by the formula alone.
  • Book value = Cost − Accumulated depreciation.
  • Cost includes purchase price plus freight, installation and other costs needed to bring the asset into use.
  • For a part year, multiply the annual charge by months used ÷ 12.
  • Entry: Depreciation A/c Dr, to Asset A/c (or Provision for Depreciation A/c) Cr.
  • Depreciation is a non-cash expense and is transferred to the profit and loss account at year end.

Depreciation (Straight Line and Diminishing Balance Methods) practice questions

Depreciation (Straight Line and Diminishing Balance Methods) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Depreciation (Straight Line and Diminishing Balance Methods): frequently asked questions

What is the difference between straight line and diminishing balance depreciation?

Under SLM the charge is the same every year because it is based on cost less residual value. Under the diminishing balance method the charge falls each year because the rate is applied to the reducing book value.

Is the diminishing balance method the same as WDV?

Yes. Diminishing balance, reducing balance and written down value are different names for the same method. The rate is applied to the opening book value each year.

Do I need to learn AS 6 in detail for CMA Foundation?

You need the basics, such as what depreciable amount, useful life and the need for a consistent method mean. Focus on understanding the ideas well enough to answer objective questions rather than memorising long text.

How many questions can I expect from depreciation?

The paper is made of 50 MCQs, and the number from any one chapter can vary. Since depreciation is short and numerical, it is worth preparing thoroughly because you can score quickly on it.