Fundamentals of Financial and Cost Accounting · Depreciation (Straight Line and Diminishing Balance Methods)

Accounting Entries and Change in Depreciation Method

Updated 10 October 2026 · Fact-checked

Depreciation entries record the yearly fall in an asset's value. Either credit the asset account directly, or credit a Provision for Depreciation account and keep the asset at cost. On sale, compare sale price with book value to find profit or loss. Under AS 6, a change of method is applied retrospectively, with the difference adjusted in the year of change.

Understand Accounting Entries and Change in Depreciation Method

Depreciation is an expense. It reduces profit and, in the books, reduces the value of the asset. You always debit the Depreciation Account and then close it to the Profit and Loss Account at year end. The only choice is where the credit goes.

Method 1: Asset account method (direct). Credit the Asset Account. The asset shows at its written down value (cost less depreciation so far). Entry: Depreciation A/c Dr, To Asset A/c.

Method 2: Provision for Depreciation account method (accumulated depreciation). Credit the Provision for Depreciation Account. The asset account stays at original cost year after year. The balance sheet shows cost less the provision. Entry: Depreciation A/c Dr, To Provision for Depreciation A/c.

Sale of an asset. First find the book value on the date of sale (cost less depreciation up to that date). If the sale price is more than book value, there is a profit. If it is less, there is a loss. Under the provision method, you must also move the depreciation already provided on that asset out of the provision account, by transferring it to the Asset Disposal Account.

Change in method. A business may switch, for example, from diminishing balance to straight line. Under AS 6, you may change the method only if the change is required by statute, is needed to comply with an accounting standard, or gives a more appropriate presentation of the financial statements.

The change is applied retrospectively. You recompute depreciation under the new method from the date the asset was first used. Then you find the difference between that amount and the depreciation actually charged in past years. This deficiency or surplus is adjusted in the year of change. A shortfall is charged as extra depreciation. An excess is written back.

Some questions give a specific instruction to apply the new method prospectively, that is, to the book value on the change date over the remaining life. Use that treatment only when the question says so.

Key formulas to remember

Depreciation entry (asset method): Depreciation A/c Dr; To Asset A/c; Asset is shown at written down value. Then: Profit and Loss A/c Dr; To Depreciation A/c.
Depreciation entry (provision method): Depreciation A/c Dr; To Provision for Depreciation A/c; Asset stays at cost. Balance sheet shows cost less provision.
Book value at date of sale: Book value = Cost − Depreciation up to date of sale; Include depreciation for the part of the year up to the sale date.
Profit or loss on sale: Profit or loss = Sale price − Book value; Positive means profit. Negative means loss.
Disposal entries (asset method): Bank A/c Dr; To Asset A/c (sale price). Then transfer the difference to Profit and Loss A/c.; Profit: credit Profit and Loss A/c. Loss: debit Profit and Loss A/c.
Disposal entries (provision method): 1) Asset Disposal A/c Dr; To Asset A/c (cost). 2) Provision for Depreciation A/c Dr; To Asset Disposal A/c (depreciation on that asset). 3) Bank A/c Dr; To Asset Disposal A/c (sale price).; The balance on Asset Disposal A/c is the profit (credit) or loss (debit).
Straight line depreciation: (Cost − Scrap value) ÷ Life in years; Same amount every year.
Diminishing balance depreciation: Rate × Opening book value; Amount falls every year.
Change of method, retrospective (AS 6): Adjustment = Depreciation under new method from first use − Depreciation actually charged, for past years; Surplus (excess charged earlier) is written back. Deficiency (shortfall) is charged in the year of change.

How to solve Accounting Entries and Change in Depreciation Method questions

Use this order for any question on entries, ledgers, sale or change of method.

1Read which method of recording is asked: asset account (direct) or provision for depreciation account.
2Note the cost, date of purchase, rate, method (straight line or diminishing balance) and the financial year end.
3Compute depreciation for each year, using months if the purchase or sale falls within a year.
4Pass or draw the entry: debit Depreciation A/c, credit the Asset A/c or the Provision A/c as required.
5For a sale, find the book value on the sale date and compare it with the sale price to get profit or loss.
6In the provision method, open an Asset Disposal A/c and move cost, accumulated depreciation and sale price through it.
7For a change of method, apply it retrospectively as AS 6 requires: recompute depreciation under the new method from the date of first use, find the difference from what was charged, and adjust it in the year of change. Use prospective treatment only if the question instructs it.
8Check that the closing balance of the asset (or cost less provision) matches your working.

Quickest way: Book value comparison for MCQs

When to use it: Use for MCQs on profit or loss on sale and on balance sheet values, where you only need a final number.

Find total depreciation to the sale date. For straight line, multiply the yearly amount by years and part years.
Subtract it from cost to get book value.
Subtract book value from sale price. A positive result is profit, a negative result is loss.
For provision-method MCQs, remember that the asset stays at cost. Only the provision changes.
Eliminate options with wrong signs, for example a profit shown where sale price is below book value.

Common mistakes in Accounting Entries and Change in Depreciation Method

Crediting the Asset Account when the question asks for the Provision for Depreciation method.
Students learn the direct entry first and use it by habit.
Fix: Underline the method in the question. In the provision method, the asset account never changes until disposal.
Forgetting to transfer the accumulated depreciation to the Asset Disposal Account on sale.
Students focus only on cost and sale price.
Fix: Always do three entries: cost out, provision in, sale proceeds in. Then read the balance.
Calculating profit on sale as sale price minus cost.
Book value is ignored.
Fix: Always compare sale price with cost less depreciation up to the sale date.
Charging a full year of depreciation in the year of sale or purchase.
Students ignore the date given in the question.
Fix: Count months from purchase date or up to sale date, unless the question says to charge a full year.
Applying the new method only to the book value on the change date when the question does not ask for prospective treatment.
Students find prospective working easier and skip the past-year adjustment.
Fix: Under AS 6 the change is retrospective. Recompute from the date of first use, find the difference from depreciation already charged, and adjust it in the year of change. Use the book value approach only if the question says prospective.
Mixing up debit and credit for profit and loss on sale.
Profit seems like it should be a debit.
Fix: Profit on sale is a gain, so credit it to Profit and Loss A/c. Loss is debited.

Worked examples

Example 1

A machine costing ₹1,00,000 was bought on 1 April 2024. Depreciation is 10% per annum on the straight line method on original cost. Accounts close on 31 March. The Provision for Depreciation method is used. On 31 March 2026 the machine was sold for ₹75,000. Find the profit or loss on sale and give the disposal entries.

Show the solution

Yearly depreciation = 10% of ₹1,00,000 = ₹10,000.
Depreciation for 2024-25 and 2025-26 = ₹20,000. This sits in the Provision for Depreciation A/c.
Book value on 31 March 2026 = ₹1,00,000 − ₹20,000 = ₹80,000.
Sale price ₹75,000 is less than book value ₹80,000, so loss = ₹5,000.
Entry 1: Asset Disposal A/c Dr ₹1,00,000; To Machinery A/c ₹1,00,000.
Entry 2: Provision for Depreciation A/c Dr ₹20,000; To Asset Disposal A/c ₹20,000.
Entry 3: Bank A/c Dr ₹75,000; To Asset Disposal A/c ₹75,000.
Asset Disposal A/c: debit ₹1,00,000, credit ₹95,000. Balance ₹5,000 on the debit side is a loss.
Entry 4: Profit and Loss A/c Dr ₹5,000; To Asset Disposal A/c ₹5,000.

Answer: Loss on sale is ₹5,000, transferred to Profit and Loss A/c.

Example 2

On 1 April 2024 a firm bought furniture for ₹50,000 with an expected life of 5 years and nil scrap value. It charged depreciation at 20% on diminishing balance for 2024-25 and 2025-26. From 1 April 2026 it changes to the straight line method, applied retrospectively as AS 6 requires (from the date the asset was first used). Find the total depreciation charged in 2026-27 and the book value on 31 March 2027.

Show the solution

Depreciation actually charged: 2024-25 = 20% of ₹50,000 = ₹10,000. Book value = ₹40,000.
2025-26 = 20% of ₹40,000 = ₹8,000. Total charged so far = ₹18,000.
Straight line depreciation per year = ₹50,000 ÷ 5 = ₹10,000.
Straight line depreciation for the two past years = ₹20,000.
Adjustment = ₹20,000 − ₹18,000 = ₹2,000 shortfall, charged in 2026-27.
Depreciation for 2026-27 = ₹10,000 current year + ₹2,000 adjustment = ₹12,000.
Book value on 31 March 2027 = ₹50,000 − (₹18,000 + ₹12,000) = ₹20,000.
Check: straight line for 3 years = ₹30,000, and ₹50,000 − ₹30,000 = ₹20,000.

Answer: Total depreciation charged in 2026-27 is ₹12,000 (₹10,000 plus ₹2,000 adjustment) and the book value on 31 March 2027 is ₹20,000.

Example 3

Same furniture: cost ₹50,000 on 1 April 2024, 20% diminishing balance charged for 2024-25 and 2025-26. This time the question instructs that from 1 April 2026 the firm changes to straight line with prospective effect, with a remaining life of 4 years and nil scrap value. Find the depreciation for 2026-27 and the book value on 31 March 2027.

Show the solution

Depreciation 2024-25 = ₹10,000. Book value = ₹40,000.
Depreciation 2025-26 = 20% of ₹40,000 = ₹8,000. Book value on 31 March 2026 = ₹32,000.
Prospective change as instructed: apply the new method to ₹32,000 over 4 years.
Depreciation for 2026-27 = ₹32,000 ÷ 4 = ₹8,000.
Book value on 31 March 2027 = ₹32,000 − ₹8,000 = ₹24,000.

Answer: Depreciation for 2026-27 is ₹8,000 and the book value on 31 March 2027 is ₹24,000.

Exam tips

Check the method named in the question first. Many MCQs differ only in whether the asset is shown at cost or at written down value.
In sale questions, find the exact months of use before computing depreciation. Dates in the question matter.
Under the provision method, remember that the Asset Disposal A/c balance gives profit or loss directly.
For a change of method, remember that AS 6 requires retrospective treatment: recompute from the date of first use and adjust the difference in the year of change. If the question says prospective, follow that instruction and use the book value over the remaining life.
Write the book value on a rough sheet. Compare it with the sale price and you can answer the MCQ in seconds.

Practice questions from Depreciation (Straight Line and Diminishing Balance Methods)

Accounting Entries and Change in Depreciation Method in other exams

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

Accounting Entries and Change in Depreciation Method: frequently asked questions

What is the difference between the asset account method and the provision for depreciation account method?

In the asset account method, you credit depreciation to the asset itself, so the asset shows at written down value. In the provision method, you credit a separate Provision for Depreciation account and keep the asset at original cost. Profit is the same in both methods.

How do you find profit or loss on sale of a fixed asset?

Find the book value on the sale date, which is cost less depreciation up to that date. Then subtract the book value from the sale price. A positive result is a profit and a negative result is a loss.

What happens to the provision for depreciation when an asset is sold?

The depreciation provided on that asset is transferred to the Asset Disposal account by debiting the Provision for Depreciation account. Provision on other assets stays in the books. The disposal account then shows the profit or loss.

How is a change in the method of depreciation treated?

Under AS 6, you change the method only if a statute or an accounting standard requires it, or if it gives a more appropriate presentation. The change is applied retrospectively. You recompute depreciation under the new method from the date of first use and adjust the difference from the depreciation actually charged in the year of change. Use prospective treatment only if the question specifically instructs it.