Financial Accounting · Accounting Fundamentals

Depreciation Accounting: Methods, Change of Method and Disposal

Updated 10 October 2026 · Fact-checked

Depreciation accounting spreads the depreciable amount of an asset (cost less residual value) over its useful life. Under straight line you charge an equal amount each year. Under written down value you charge a fixed percentage on the opening book value. On sale, compute book value, then record profit or loss.

Understand Depreciation Accounting

An asset such as a machine gives benefit for many years. If you charge its whole cost to profit in the year of purchase, that year looks poor and later years look rich. Depreciation fixes this by charging a part of the cost in each year of use.

The amount to be spread is the depreciable amount: cost less estimated residual (scrap) value. Cost includes the purchase price plus costs to bring the asset to working condition, such as freight and installation. The period is the useful life.

In the straight line method (SLM) the charge is the same every year, so the book value falls in a straight line. In the written down value method (WDV) the charge is a fixed percentage of the opening book value, so it is high in early years and falls later. Depreciation is a non-cash charge. It moves cost from the balance sheet to the profit and loss account and does not create any cash fund.

The treatment of a change in method depends on the framework. Under the Indian AS 6 position, a change in method is a change in accounting policy. You recompute depreciation from the date the asset was first used under the new method, adjust the excess or deficiency in the year of change, and disclose it. Under Ind AS 8, a change in depreciation method is a change in accounting estimate and is applied prospectively, so past depreciation is not recomputed. Follow the framework the question states. When an asset is sold, you bring depreciation up to the date of sale, find the book value, and compare it with the sale price. The difference is profit or loss on sale, not depreciation.

You should also note whether the question says depreciation is charged for the full year, or pro rata by months from the date of purchase. Follow the question's instruction. If silent, charge on a time basis from the date of purchase.

Key rules to remember

Depreciable amount: Depreciable amount = Cost of asset − Residual value; Cost includes freight, installation and other costs to bring the asset to use.
Straight line depreciation: Annual depreciation = (Cost − Residual value) ÷ Useful life in years; Same amount each full year. For part year, multiply by months used ÷ 12.
SLM rate on cost: Rate % = (Annual depreciation ÷ Cost) × 100; Gives the equivalent rate on original cost. When a rate is given in the question, apply it on cost every year; residual value matters when you must find the life or the rate.
Written down value depreciation: Depreciation = Opening book value × Rate %; Book value = cost less accumulated depreciation. Rate applies to the reducing balance.
Profit or loss on sale: Profit/(Loss) = Sale proceeds − Book value at date of sale; Book value is after depreciation up to the date of sale. Positive means profit.
Change of method adjustment (retrospective, AS 6 position): Adjustment = Accumulated depreciation under new method − Accumulated depreciation actually charged under old method; If new is higher, charge the shortfall. If lower, credit the excess. Both run from first use to the date of change and are recorded in the year of change. Under Ind AS 8 the change is prospective and no such adjustment is made.

How to solve Depreciation Accounting questions

Use this order for any depreciation question, whether it asks for ledger accounts, journal entries or a change of method.

1Read the facts: date of purchase, cost, installation costs, residual value, life or rate, year end and the method.
2Find the correct cost of each asset by adding freight, installation and similar costs. Do not add repairs.
3Decide the period for each asset. Use months from the date of purchase unless the question states otherwise.
4Compute depreciation year by year with the formula for the stated method. If a rate is given, apply it on cost (SLM) or on the opening book value (WDV). Deduct residual value when you must compute depreciation from the life, or find the life or rate.
5For a sale, charge depreciation up to the date of sale, then find the book value.
6Compare the sale price with the book value and record profit or loss on sale.
7Write the journal entries and then the asset account, the provision for depreciation account if used, and the disposal account.
8If the method changes, check the framework. Where the change is applied retrospectively (AS 6 position), compute depreciation under the new method from the date of first use, find the difference with the old depreciation already charged, and pass an adjusting entry. Where it is a change in estimate (Ind AS 8), apply the new method from the date of change only.
9Check that the closing asset balance equals cost less total depreciation.

Quickest way: Table method with book value column

When to use it: Use it when an asset is held over several years, or when a sale or change of method is involved and time is short.

Draw columns: Year, Opening value, Depreciation, Closing value.
Fill year by year. For SLM subtract the same amount. For WDV multiply the opening value by the rate.
Stop the table at the date of sale or change.
Read the book value from the last closing figure.
For a retrospective change of method, run a second table under the new method and subtract the totals of depreciation.
Post only the final totals to the ledger or journal.

Common mistakes in Depreciation Accounting

Applying the WDV rate on original cost every year
Students carry the SLM habit into WDV.
Fix: Write the opening book value in each row and apply the rate only to that figure.
Ignoring the residual value when it is needed
The question states scrap value in a side note and it is missed.
Fix: When depreciation is to be worked out from cost, life and scrap value, compute the depreciable amount first. When a rate is given, apply it on cost (SLM) or opening book value (WDV). Residual value matters when the question asks you to compute the life or the rate.
Charging a full year's depreciation on a part year asset
Students overlook the purchase date.
Fix: Count months from the purchase date to the year end unless the question gives a different convention.
Treating profit or loss on sale as depreciation
Both arise on the same asset, so they get mixed.
Fix: Depreciation up to the date of sale is a charge. Profit or loss on sale is sale price less book value and is shown separately.
Adding installation or freight to the expense instead of cost
Students treat them as day to day costs.
Fix: Costs needed to bring the asset to working condition go into cost and are depreciated. Later repairs are expenses.
Adjusting only the current year when the change is retrospective
Students forget that, under the AS 6 position, the new method is applied from the date of first use.
Fix: Where the question requires retrospective application, recompute the full past depreciation under the new method and book the difference as an adjustment along with the current year charge. If the question says the change is an estimate (Ind AS 8), apply the new method from the date of change only.

Worked examples

Example 1

Sharma Traders bought machinery on 1 April 2023 for ₹5,00,000 and spent ₹50,000 on installation. Residual value is ₹50,000 and life is 10 years. The books are closed on 31 March each year. On 31 March 2026 (after charging depreciation for the year) the machine is sold for ₹4,00,000. Use SLM. Find the profit or loss on sale and pass the entries.

Show the solution

Cost = 5,00,000 + 50,000 = ₹5,50,000.
Depreciable amount = 5,50,000 − 50,000 = ₹5,00,000.
Annual depreciation = 5,00,000 ÷ 10 = ₹50,000.
Depreciation for 3 years (2023-24, 2024-25, 2025-26) = ₹1,50,000.
Book value on 31 March 2026 = 5,50,000 − 1,50,000 = ₹4,00,000.
Sale price = ₹4,00,000. Profit or loss = 4,00,000 − 4,00,000 = Nil.
Entries: Machinery Disposal A/c Dr ₹5,50,000 to Machinery A/c; Provision for Depreciation A/c Dr ₹1,50,000 to Machinery Disposal A/c; Bank A/c Dr ₹4,00,000 to Machinery Disposal A/c.
Disposal A/c debits total 5,50,000 and credits total 1,50,000 + 4,00,000 = 5,50,000. It balances, so no profit or loss.

Answer: Book value is ₹4,00,000. Sale at ₹4,00,000 gives no profit or loss.

Example 2

Mehta Industries bought a machine on 1 April 2024 for ₹1,00,000 and charged depreciation under WDV at 20% p.a. On 1 April 2026 it changes to SLM at 10% p.a. on original cost, applied retrospectively from the date of purchase (AS 6 position). Books close on 31 March. Find the adjustment.

Show the solution

Old method (WDV 20%): Year 2024-25 depreciation = 1,00,000 × 20% = ₹20,000. Book value = ₹80,000.
Year 2025-26 depreciation = 80,000 × 20% = ₹16,000. Total old depreciation = ₹36,000.
Old book value on 1 April 2026 = 1,00,000 − 36,000 = ₹64,000.
New method (SLM 10% on cost): 1,00,000 × 10% = ₹10,000 a year.
For 2 years (2024-25 and 2025-26) = ₹20,000.
Difference = 36,000 − 20,000 = ₹16,000. Depreciation was over-charged, so this is written back.
Entry: Provision for Depreciation A/c (or Machinery A/c) Dr ₹16,000 to Profit and Loss A/c ₹16,000 (excess depreciation written back on change of method).
Corrected book value on 1 April 2026 = 1,00,000 − 20,000 = ₹80,000. Check: 64,000 + 16,000 = ₹80,000.
Disclose the change, its reason and its effect.

Answer: ₹16,000 of excess depreciation is written back to profit and loss. Book value moves from ₹64,000 to ₹80,000 on 1 April 2026.

Exam tips

Mark the purchase date and sale date on a timeline before calculating. Most errors in this topic come from wrong months.
In MCQs, check whether the question gives a rate on cost or on reducing balance before you compute.
For written answers, show the working of cost, depreciation and book value in separate lines so you earn step marks even if one figure is wrong.
In a disposal question, write the Asset Disposal Account in full. The examiner can see profit or loss from its balance.
State the policy change and its effect in a line when a method is changed, as disclosure carries marks.

Practice questions from Accounting Fundamentals

Depreciation Accounting in other exams

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

Depreciation Accounting: frequently asked questions

What is the difference between straight line and written down value method?

Straight line charges the same amount every year on cost less residual value. Written down value charges a fixed percentage on the opening book value, so the charge falls each year. SLM suits assets that give equal benefit each year. WDV suits assets that lose more value early.

How do I change the method of depreciation with retrospective effect?

Under the AS 6 position, recompute depreciation under the new method from the date of first use to the date of change. Subtract the depreciation already charged under the old method. The difference is charged or credited to profit and loss in the year of change, and the change is disclosed. Under Ind AS 8 the change is an estimate and is applied prospectively, with no such adjustment.

What are the journal entries on sale of an asset?

Transfer the asset at cost and the accumulated depreciation to an Asset Disposal Account, then record the sale proceeds. The balance of the disposal account is profit or loss on sale. If you charge depreciation directly on the asset, first charge depreciation up to the date of sale.

Is residual value deducted under the WDV method?

When a rate is given, you apply it to the opening book value and do not deduct residual value each year. Residual value is used when you compute the rate or the depreciable amount.