Depreciable Assets

The assets that are purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings, furniture & fixtures and equipment. 

In the accounting world, these are also called as "Fixed Assets" or "Property Plants & Equipment (PPE)

Classification of Assets:

The Assets can be classified into Tangible or Intangible assets.

Tangible Assets:

Tangible assets are those assets which we can touch, see and feel. For example, Building, Furniture, Machinery etc.

Intangible Assets:

Intangible assets cannot be seen, felt or touched physically by us, but they are also valuable. For example, Intellectual Property, Copyrights, Brands, Trademarks etc.


A reduction in the value of an asset over time, due to use, wear and tear or obsolescence. As we use the assets, obviously the capacity and quality will deteriorate, the measurement of the same is called as depreciation. Calculating the right depreciation gives us correct value of the Asset which is shown in the Balance Sheet.  

What does depreciation refer to in accounting?

Increase in the value of an asset over time
The process of revaluing assets
Allocation of the cost of an asset over its useful life
Reduction in the market value of an asset

Methods of Depreciation:

There are various methods of depreciation. However, the straight line method (SLM) and the written down value (WDV) method are the most popular. SLM means equal depreciation every year.

SLM Method

Let us understand through an example, Suppose you bought a car for Rs.10 lakhs and if we assume that the useful life of the car is 5 years. Then the depreciation per year will be 2 lakhs. (Amount / Life in Years). This is called as Straight line method. The Rate of depreciation per year in this case is 20% p.a. Thus, depreciation of 2 Lacs p.a. is 20% of the original cost of Rs.10 lacs.

Formula for calculating Depreciation by SLM

Hence, to compute depreciation, we need 3 things i.e. Cost of the Asset, estimated life of Asset and residual value of the asset.

Assuming, this car can be sold after 5 year for Rs. 1Lac (residual value), then instead of dividing the actual cost, we will compute depreciation per year by Rs.9 Lakhs / 5 Years. Hence Depreciation per year shall be Rs.1.8 Lakhs per year.

Now, since there are assumptions involved on the useful life of the asset and the future expected residual value, it may create a lot of confusion, if everyone starts using their own assumptions. To solve this, there are rules as per law under different Acts, on the method and process of computation. Like in India, Depreciation as per Income Tax is different from Depreciation as per the Companies Act. Hence, any entity which is not a company, follows the Income Tax method and for companies, both IT Act and Companies Act needs to be followed. 

Assuming the life of asset is 10 years, what is rate of depreciation assuming SLM method ?

None of the above

WDV Method

WDV means written down value method, which is Cost reduced by depreciation. The depreciation rate is applied on the WDV. 

Let us understand the WDV method with a simple example:

Asset Original Cost - Rs.100
Rate of Depreciation  - 10%
Method - WDV

1st year:
Depreciation  = Cost (Rs.100) x Rate (10%) = Rs.10
WDV at the end of the year = Original Cost (Rs.100) - Depreciation (Rs.10) = 90

2nd Year:
Opening WDV = Rs.90 (brought forward from last year)
Depreciation  = WDV (Rs.90) x 10% = Rs.9
WDV at the end of the year = Opening WDV (90) - Depreciation (9) = 81

Thus, it may be now clear that, depreciation is calculated on the written down value of the asset.

Which depreciation method allocates an equal amount of depreciation expense each year?

Units of production method
Double-declining balance method
Straight-line method
Reducing balance method

In the reducing balance method of depreciation, the depreciation expense each year is calculated as a percentage of:

The book value of the asset at the beginning of the year
The salvage value of the asset
The total cost of the asset
The accumulated depreciation