CUET UG Business Studies Accounting Depreciation SLM vs WDV Causes Effects on Profit

Must-Know (15–20 detailed bullets)

• Depreciation is the systematic allocation of the cost of a tangible fixed asset over its useful life due to wear and tear, obsolescence, or expiry. Example: A machine costing ₹500,000 with a 10-year life depreciates by ₹50,000 annually under SLM.

• Straight Line Method (SLM) charges equal depreciation amount every year. Formula: (Cost of asset – Estimated scrap value) ÷ Estimated useful life. Example: ₹100,000 machine, ₹10,000 scrap value, 9-year life → ₹(100,000 – 10,000)/9 = ₹10,000/year.

• Written Down Value (WDV) method applies a fixed percentage to the reducing balance of the asset each year. Example: ₹100,000 asset, 10% WDV → Year 1: ₹10,000 dep., Year 2: 10% of ₹90,000 = ₹9,000.

• SLM results in higher depreciation in early years compared to WDV only if the WDV rate is low; otherwise, WDV gives higher early charges. For same asset, 10% WDV > SLM in early years if SLM rate is less than 10%.

• Under Companies Act, 2013, companies must depreciate assets using either SLM or WDV as per Schedule II. Verify from NCERT.

• Depreciation is a non-cash expense but reduces taxable profit, thereby reducing tax liability. Example: ₹50,000 depreciation → reduces profit by ₹50,000 → lowers tax payment.

• Depreciation causes accumulated depreciation to increase and book value of asset to decrease on the Balance Sheet.

• Obsolescence due to technological change is a cause of depreciation. Example: Typewriters replaced by computers.

• Physical wear and tear from continuous use leads to depreciation. Example: Vehicle tyres wearing out over time.

• Passage of time causes depreciation even if asset is idle. Example: Leasehold property loses value as lease period expires.

• Depletion refers to exhaustion of natural resources (e.g., mines), not depreciation, though conceptually similar.

• Depreciation is charged on all fixed assets except land, which appreciates over time.

• Charging higher depreciation in early years (as in WDV) reduces early profits but increases later profits, affecting profitability trends.

• SLM shows uniform profit impact each year; WDV shows lower profits in early years and higher in later years.

• If no scrap value is given, it is assumed to be zero in calculations. Example: ₹200,000 machine, 5-year life, no scrap → SLM = ₹40,000/year.

• WDV method is also called Reducing Balance Method. It is mandatory for certain assets under tax laws (e.g., Income Tax Act for some cases). Verify from NCERT.

• Depreciation is debited to Profit & Loss Account and reduces net profit.

• The purpose of depreciation is to match cost of asset with revenue it generates over its useful life (matching principle).

• Change in depreciation method is treated as change in accounting policy and must be disclosed. Verify from NCERT.

• Residual value (scrap value) is estimated realizable value at the end of useful life. Example: Old machine sold for ₹5,000 after 10 years.

Difficulty Level

Intermediate — Requires understanding of accounting principles, numerical application, and comparison between methods; not formula-based only.

Common CUET Traps (3 bullets)

• Trap: Assuming WDV gives same annual charge as SLM if percentage equals SLM rate.
  Avoid: WDV percentage is applied on reducing balance, so annual charge declines; even if WDV rate = SLM rate, amounts differ after Year 1.

• Trap: Charging depreciation on land.
  Avoid: Land is not depreciated as it does not wear out or become obsolete; only buildings and other fixed assets are depreciated.

• Trap: Thinking depreciation increases cash in hand.
  Avoid: Depreciation is non-cash expense; it reduces profit but does not involve cash outflow; however, it reduces tax, which saves cash.

Practice MCQs (5 questions)

Q1. A machine costs ₹400,000, has a useful life of 10 years, and an estimated scrap value of ₹40,000. What is the annual depreciation under SLM?
A. ₹40,000
B. ₹36,000
C. ₹44,000
D. ₹30,000
Answer: B
Explanation: SLM = (400,000 – 40,000)/10 = ₹36,000.
Why others fail: Option A ignores scrap value, a common error.

Q2. Which method charges higher depreciation in the initial years?
A. SLM
B. WDV
C. Both same
D. None
Answer: B
Explanation: WDV charges higher in early years due to application on original cost initially.
Why others fail: Students confuse equal SLM charge as "higher" over time, but WDV dominates early.

Q3. Depreciation is charged to:
A. Balance Sheet asset side
B. Capital Account
C. Profit & Loss Account
D. Cash Account
Answer: C
Explanation: Depreciation is an expense, so it is debited to Profit & Loss Account.
Why others fail: Option A misleads as asset value is reduced, but depreciation entry is in P&L.

Q4. A company uses WDV method at 20% p.a. on a machine costing ₹200,000. What is depreciation in the second year?
A. ₹40,000
B. ₹32,000
C. ₹36,000
D. ₹25,600
Answer: B
Explanation: Year 1 dep. = 20% of ₹200,000 = ₹40,000; WDV = ₹160,000; Year 2 = 20% of ₹160,000 = ₹32,000.
Why others fail: Option A is Year 1 charge, tempting if student forgets reducing balance.

Q5. As per the Companies Act, 2013, which method(s) can be used for depreciation accounting?
A. Only SLM
B. Only WDV
C. Either SLM or WDV as per Schedule II
D. Any method decided by management
Answer: C
Explanation: Schedule II of Companies Act, 2013 permits either SLM or WDV.
Why others fail: Option D seems flexible but is incorrect—method must comply with Schedule II.

Last‑Minute Revision (15–20 one‑liners)

• ⚠️ Depreciation = (Cost – Scrap Value) / Useful Life (SLM formula).
• ⚠️ WDV method applies fixed % on opening book value every year.
• ⚠️ Land is never depreciated — its value appreciates.
• ⚠️ Depreciation is non-cash expense — reduces profit but not cash.
• ⚠️ Obsolescence, wear & tear, and passage of time cause depreciation.
• ⚠️ SLM gives equal annual charge; WDV gives declining charge.
• ⚠️ WDV also called Reducing Balance Method.
• ⚠️ Higher early depreciation (WDV) → lower early profits.
• ⚠️ Depreciation charged to Profit & Loss Account.
• ⚠️ Book value = Original cost – Accumulated depreciation.
• ⚠️ Scrap value = Estimated realizable value at end of useful life.
• ⚠️ Change in depreciation method = Change in accounting policy — disclose.
• ⚠️ Companies Act, 2013 mandates SLM or WDV as per Schedule II.
• ⚠️ Depletion applies to natural resources like mines, not depreciation.
• ⚠️ No depreciation on assets held for less than one year.
• ⚠️ Matching principle: Depreciation matches asset cost with revenue.
• ⚠️ WDV rate often higher than SLM rate to accelerate write-off.
• ⚠️ Tax benefit: Depreciation reduces taxable income.
• ⚠️ SLM better for assets with uniform usage; WDV for rapid tech obsolescence.
• ⚠️ If scrap value not given, assume zero.