Depreciation Methods: SLM and WDV with Formulas and Examples

What is depreciation?

Depreciation is the part of a fixed asset’s cost that you charge as an expense each year it is in use. A machine earns income for several years, so its cost is spread over those years.

ICAI’s AS 10 (Revised), Property, Plant and Equipment, defines it this way: “Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.” Every method in this guide is a different way of doing that allocation. Three inputs, and the depreciable amount they give, drive all of them:

Two points from AS 10 come up often in viva and interviews. Land is not depreciated, because it has an unlimited useful life (quarries and landfill sites are exceptions); buildings are. And an asset that sits idle is still depreciated, unless it is fully depreciated or held for disposal. Repairs don’t remove the need to depreciate either.

Depreciation is a non-cash expense: no money leaves the business, but profit and the asset’s book value both fall.

Methods of depreciation at a glance

AS 10 doesn’t force one method on you. Para 62 says the method “should reflect the pattern in which the future economic benefits of the asset are expected to be consumed”. Para 64 names three methods, and the NCERT Class 11 chapter on depreciation lists several more that you may meet in older books or exams.

One method is ruled out. AS 10 para 65 says a method based on the revenue the asset helps generate “is not appropriate”, because revenue is affected by prices and sales volume, not only by how much of the asset is used up.

Straight line method of depreciation (SLM)

Under the straight line method, you charge an equal amount of depreciation every year of the asset’s useful life. It is also called the fixed instalment method. Plotted against time, book value falls in a straight line.

SLM formula and rate

Annual depreciation = (Cost of asset − Residual value) ÷ Useful life in years

Rate of depreciation (%) = Annual depreciation ÷ Cost of asset × 100

Note that NCERT works out the SLM rate on the full cost, not on the depreciable amount. When a question says “depreciate at 10% on the straight line method”, it means 10% of the original cost every year.

Example 1: straight line method, year by year

Sharma Traders (hypothetical sole proprietor) buys a machine on 1 April 2026 for ₹95,000 and pays ₹5,000 for freight and installation. Expected residual value is ₹10,000 after 5 years. Books close on 31 March.

• Cost = ₹95,000 + ₹5,000 = ₹1,00,000
• Annual depreciation = (₹1,00,000 − ₹10,000) ÷ 5 = ₹18,000
• Rate = ₹18,000 ÷ ₹1,00,000 × 100 = 18% a year on cost

Quick check: total depreciation equals the depreciable amount (₹90,000), and the final book value equals the residual value.

Advantages and limitations of SLM

• Advantages: it is simple to calculate and explain; it writes the asset down exactly to its residual value (or to zero); and an equal charge each year makes profits easy to compare across years.
• Limitations: it assumes the asset is equally useful every year, which is rarely true. As a machine ages, repairs go up while depreciation stays the same, so the total charge for depreciation plus repairs rises in later years.

In Excel, =SLN(100000,10000,5) returns 18,000, the annual SLM charge.

Written down value method of depreciation (WDV)

Under the written down value method, you apply a fixed percentage to the asset’s book value at the start of each year. Because the book value keeps falling, the depreciation charge falls too. NCERT also calls it the reducing balance, reducing instalment or diminishing value method.

WDV formula and how to find the rate

Depreciation for the year = Opening written down value × Rate ÷ 100

Exam questions usually give you the rate. When they give cost, residual value and life instead, use this formula:

Rate (%) = [1 − (Residual value ÷ Cost)^1/n] × 100, where n is the useful life in years.

A common mistake is to use the SLM rate (annual SLM charge ÷ cost) as the WDV rate. It isn’t. Applied to a falling balance, the SLM rate of 18% would leave the machine at about ₹37,000 after 5 years, not ₹10,000.

For the same machine (cost ₹1,00,000, residual ₹10,000, life 5 years):

1. Residual ÷ Cost = 10,000 ÷ 1,00,000 = 0.1
2. Take the fifth root (power 1/5): 0.1^0.2 = 0.6310 (use a calculator’s x^y key, or =0.1^(1/5) in Excel)
3. 1 − 0.6310 = 0.3690, so the rate is 36.9%

Check: 0.631 × 0.631 × 0.631 × 0.631 × 0.631 = 0.100, so 63.1% of the value survives each year and ₹1,00,000 shrinks to about ₹10,000 in five years.

Example 2: written down value method, year by year

Same machine, same dates, depreciated at 36.9% on the reducing balance. Amounts are rounded to the nearest rupee.

At exactly 36.9%, year 5 works out to ₹5,850 and leaves ₹10,003, because the rate was rounded to one decimal. The last year’s charge is adjusted by ₹3 to bring the book value to the residual value. Show it in a working note.

Advantages and limitations of WDV

• Advantages: it charges more in the early years, when the asset is most productive and least likely to need repairs, so depreciation plus repairs stays roughly even over the asset’s life. It also writes off more of the cost before the asset becomes outdated.
• Limitations: the book value never reaches zero on its own, and choosing a suitable rate is harder.

In Excel, =DB(100000,10000,5,1) returns 36,900 for year 1. DB rounds the rate to three decimals (0.369, as here) but not the yearly amounts, so later years can differ by a rupee. Our guide to Excel formulas for accounting has more.

Straight line vs written down value method: comparison

Both methods write off the same ₹90,000 over five years. What changes is the timing, and that changes the profit in each year.

So under WDV, Sharma Traders reports ₹18,900 less profit in year 1 and ₹12,147 more in year 5 than under SLM. Over the full life, the difference is zero.

Want to try your own figures? Download the SLM vs WDV depreciation calculator (.xlsx). Enter cost, residual value and life, and it builds both schedules with live formulas, works out the WDV rate, and adjusts the final year.

Assets bought or sold during the year

When an asset is bought or sold partway through the year, you charge depreciation only for the months it was owned. NCERT applies this in its illustrations, and Schedule II to the Companies Act requires companies to calculate depreciation “on a pro rata basis” from the date of addition or up to the date of sale.

Example 3: laptop bought on 1 October

Sharma Traders buys a laptop for ₹60,000 on 1 October 2026 and depreciates it on SLM over 3 years with no residual value. Books close on 31 March.

Under WDV the same idea applies: in the first year, multiply the year’s charge by months used ÷ 12. If a question says to charge a full year, follow the question.

Journal entries for depreciation

There are two ways to record depreciation. In both, the expense goes to the profit and loss account. The difference is what happens to the asset account. Both are correct; follow the question or the business’s policy.

Method 1: charging depreciation to the asset account (direct method)

Depreciation is credited straight to the asset account, so the asset account itself shows the written down value. Entries for Example 1, year 1:

The balance sheet then shows machinery at ₹82,000, its book value. The original cost is no longer visible in the account.

Method 2: provision for depreciation (accumulated depreciation) account

Depreciation is credited to a separate Provision for Depreciation account (also called Accumulated Depreciation). The asset account stays at original cost for the whole life of the asset.

At 31 March 2028, after two years, the balance sheet shows Machinery at cost ₹1,00,000, less provision for depreciation ₹36,000, giving ₹64,000. NCERT allows the provision to be shown on the liabilities side or deducted from the asset. See how it fits into the full statement in our balance sheet format with example.

Depreciation A/c is debited because it is an expense (a nominal account). If that rule is shaky, revise the golden rules of accounting. For more practice, including a furniture depreciation question, try these solved journal entry questions.

Selling the asset under the provision method

Suppose Sharma Traders sells the machine on 31 March 2029 for ₹40,000, after charging year 3 depreciation. Accumulated depreciation is ₹54,000, so the book value is ₹46,000 and the loss on sale is ₹6,000.

The machinery account closes at zero: ₹1,00,000 − ₹54,000 − ₹40,000 − ₹6,000.

Changing the depreciation method

A business can change its depreciation method, but only for a reason. AS 10 para 63 says the method should be reviewed at least at each financial year-end, and changed if “there has been a significant change in the expected pattern of consumption” of the asset’s benefits. It adds that such a change “should be accounted for as a change in an accounting estimate in accordance with AS 5”.

That last line decides the treatment. Under AS 5 (paras 23 and 24), a change in estimate affects the current year and the remaining years. Past years are not reworked. You take the book value on the date of change and spread what is left over the remaining life. The NCERT chapter still quotes the older AS 6 here, which allows a change only “under specific circumstances”.

Example 4: switching from SLM to WDV after two years

Sharma Traders’ machine (Example 1) has been depreciated on SLM for two years. On 1 April 2028 its book value is ₹64,000, with 3 years left and residual value still ₹10,000. A review shows the machine’s output will now drop off sharply, so the business moves to WDV.

• New rate = 1 − (10,000 ÷ 64,000)^1/3 = 1 − 0.5386 = 0.461, so 46.1%
• Years 1 and 2 stay as they were (₹18,000 each)

Year 5 at exactly 46.1% gives ₹8,571; it is raised by ₹22 to reach the residual value, again because of rounding. Years 3 to 5 total ₹54,000, which is the ₹64,000 book value less ₹10,000 residual. If the change has a material effect, its nature and amount are disclosed in the accounts.

Other methods: units of production and sum of years’ digits

Units of production method

AS 10 para 64 says the charge is “based on the expected use or output”. It suits assets whose wear depends on how hard they work, and under this method the charge can be zero in a year with no production.

Depreciation = (Cost − Residual value) ÷ Total expected units × Units used this year

Suppose Sharma Traders expects the machine to run 50,000 hours in total. The rate is ₹90,000 ÷ 50,000 = ₹1.80 per hour.

Sum of years’ digits method

This one is on the NCERT list of other methods. Add up the digits of the useful life (for 5 years, 1 + 2 + 3 + 4 + 5 = 15). Each year’s charge is the remaining life at the start of that year divided by 15, times the depreciable amount. Like WDV, it charges more in early years, but it reaches the residual value exactly.

Depreciation under the Companies Act and income-tax law

A sole trader or partnership picks a method and life that fit the asset. Companies also follow Schedule II to the Companies Act 2013, titled “Useful lives to compute depreciation”. It gives useful lives, not rates. The company then applies SLM or WDV over that life and works out its own rate. Some lives from Part C, as published on India Code:

Schedule II also says a company’s residual value shall not be more than 5% of the original cost, and that a company using a different life or residual value must disclose the difference and justify it with technical advice. AS 10 adds that the method and useful lives (or rates) used must be disclosed for each class of asset.

Tax depreciation is a separate calculation. Income-tax law prescribes its own rates and rules, so a business’s tax depreciation and book depreciation are usually different numbers. This guide covers book depreciation only.

Common mistakes students make

• Charging WDV on the original cost every year. That turns it into SLM.
• Forgetting freight and installation in the cost, so every year’s figure is wrong.
• Ignoring residual value under SLM, or deducting it again under WDV (the WDV rate already allows for it).
• Depreciating land.
• Booking the expense in the P&L but not reducing the asset or the provision, so the trial balance agrees but the balance sheet overstates the asset.

Depreciation methods in Hindi (मूल्यह्रास की विधियाँ)

How we teach this at IPA

At IPA (Institute of Professional Accountants), Laxmi Nagar, depreciation is taught as entries you actually post, not only as a formula. Depreciation entries sit in the accounting foundations module of the 12-month ADFA diploma in financial accounting, next to rectification entries and balance sheet finalisation, and the same course teaches Tally Prime and BUSY. Depreciation entries are also in the syllabus of the 6-, 15- and 18-month diplomas and the BAT course.

For interview practice, see our accounting interview questions and answers.

Frequently asked questions