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CSEET · Fundamentals of Accounting

Depreciation and Amortization for CSEET Paper 2

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Amortization does the same for intangible assets. To solve questions, find cost, residual value and life, pick the method (SLM or WDV), compute each year's charge, and pass the journal entries.

What this chapter covers

This chapter shows how the cost of a long-lived asset is spread over the years it helps the business earn. You learn what depreciation means, what decides the yearly charge, how the main methods work, what happens when an asset is sold or its method changes, and how intangible assets like patents and software are written off.

The chapter links to many other parts of Paper 2. Depreciation is an expense in the Statement of Profit and Loss, so it affects profit. The reduced asset value appears in the Balance Sheet. It also shows up in final accounts, rectification of errors, and the cash and fund adjustments you meet elsewhere in the paper.

Questions are mostly numerical. You will compute yearly charges, prepare an asset account and an accumulated depreciation account, and calculate profit or loss on sale. Marks go to correct method, correct period and neat working, so practice matters more than reading.

Depreciation is a favourite for written numerical questions because it tests calculation, journal entries and ledger posting in one problem. It is also a building block for final accounts, so errors here carry into other questions. The rules are few and the sums are repeatable, which makes this chapter one of the easier places to score full marks if you practise enough.

Depreciation and Amortization: topics in the order to study them

  1. 1Meaning and Concept of DepreciationStart here so you know what depreciation is: the systematic allocation of the depreciable amount over the useful life, not a valuation exercise.
  2. 2Factors Affecting Depreciation and Accounting StandardCost, residual value and useful life drive every formula, and the standard (AS 10) explains how methods and estimates are chosen and reviewed.
  3. 3Straight Line Method of DepreciationIt is the simplest method, giving a constant charge each year, and it builds your habit of setting out workings.
  4. 4Written Down Value Method of DepreciationLearn it after SLM so you can compare: the charge falls each year because the rate applies to the reducing balance.
  5. 5Other Methods of DepreciationThe units of production method and other methods make sense once you know the two main ones.
  6. 6Disposal of Assets and Change in DepreciationThis needs the methods already clear, since you compute book value at the date of sale and handle revised estimates.
  7. 7Amortization of Intangible AssetsIt applies the same idea to intangibles, so it is easy to finish with once the logic of depreciation is settled.

How to prepare Depreciation and Amortization

Treat this as a practice chapter. Understand the logic once, then solve many small problems until the steps become automatic.

  1. Read the definition and the three inputs: cost, residual value and useful life. Write the depreciable amount as cost minus residual value.
  2. Learn the SLM formula: annual depreciation = (Cost − Residual value) ÷ Useful life. Solve five problems, including part-year cases.
  3. Learn WDV: depreciation = rate × opening book value. Solve problems where you list year, opening value, depreciation and closing value in a small table.
  4. Practise the same asset under SLM and WDV and compare the charges year by year, so you do not mix up the methods.
  5. Practise disposal: find the book value at the date of sale, compare it with the sale price, and record profit or loss. Remember to charge depreciation up to the date of sale.
  6. Do amortization problems for patents, copyrights and software, then finish with mixed timed questions with full journal entries and ledger accounts.

Common mistakes in Depreciation and Amortization

  • Using cost instead of depreciable amount in SLM

    Fix: Write 'Cost − Residual value' as the first line of every SLM sum.

  • Applying the WDV rate on original cost every year

    Fix: Make a table with opening value, depreciation and closing value, and apply the rate only to the opening value.

  • Ignoring the part-year period for assets bought or sold during the year

    Fix: Count months from the date of purchase or up to the date of sale, and charge depreciation for that part of the year.

  • Wrong book value at the time of disposal

    Fix: First charge depreciation to the date of sale, then find book value, then compare with the sale price.

  • Treating a change in method or life as a prior-period error

    Fix: Remember that AS 10 treats such a change as a change in accounting estimate, accounted for under AS 5.

  • Skipping journal entries and ledger accounts

    Fix: Practise the full set: depreciation expense entry, asset account, accumulated depreciation or provision account, and the disposal account.

Last-day revision: Depreciation and Amortization

  • Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
  • Depreciable amount = Cost − Residual value.
  • SLM: annual charge = (Cost − Residual value) ÷ Useful life; it stays constant if the residual value does not change.
  • WDV: charge = rate × opening book value; the charge falls each year.
  • Units of production: the charge is based on expected use or output.
  • A method based on revenue generated by using the asset is not appropriate under AS 10.
  • Choose the method that best reflects the expected pattern of consumption of benefits, and apply it consistently.
  • Review residual value, useful life and method at least at each financial year-end; changes are changes in accounting estimates under AS 5.
  • Depreciation starts when the asset is available for use; it does not stop just because the asset is idle.
  • Profit or loss on sale = Sale price − Book value at the date of sale.
  • Amortization is the same allocation idea, applied to intangible assets.
  • Show formula, substitution and answer in every sum to protect marks.

Depreciation and Amortization practice questions

Depreciation and Amortization in other exams

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

Depreciation and Amortization: frequently asked questions

What is depreciation in simple words?

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. It spreads the cost of the asset across the years in which it is used, instead of charging it all in the first year.

What is the difference between SLM and WDV?

SLM gives the same charge each year if the residual value does not change. WDV applies a rate to the reducing book value, so the charge is higher in early years and falls later.

Is depreciation calculated on a revenue basis?

No. AS 10 says a method based on revenue generated by an activity that uses the asset is not appropriate, because revenue reflects factors such as prices and sales volumes, not how the asset is consumed.

Does depreciation stop when an asset is idle?

No. Under AS 10, depreciation does not stop merely because the asset is idle or retired from active use but not held for disposal, unless it is fully depreciated. Under usage methods the charge can be zero when there is no production.

How should I practise this chapter for the written paper?

Solve problems with full working, including formula, table, journal entries and ledger accounts. Time yourself on mixed questions, since examiners give marks for method as well as the final answer.