Last Updated: June 2026
Depreciation Methods — SLM vs WDV, Formulas, Solved Examples & Accounting
Depreciation is a fundamental accounting concept tested extensively in the JAIIB AFM (Accounting & Financial Management for Bankers) paper. It represents the systematic allocation of the cost of a tangible fixed asset over its useful life. Banks need to understand depreciation for credit appraisal (assessing a borrower's profitability and cash flows), preparation of financial statements, and calculating the book value of collateral assets. This guide covers the two primary methods — Straight Line Method (SLM) and Written Down Value (WDV) method — with formulas, solved examples, and accounting entries.
What is Depreciation?
Depreciation is the reduction in the value of a fixed asset due to wear and tear, passage of time, obsolescence, or any other cause. As per AS-6 (Revised) / Ind AS 16, depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount is the cost of an asset minus its residual (scrap) value. Depreciation is a non-cash expense — meaning it reduces profit but does not involve actual cash outflow. This makes it important for cash flow analysis.
Key terms: (a) Cost of Asset — purchase price plus all costs to bring the asset to its intended use location and condition (installation, freight, etc.); (b) Useful Life — period over which the asset is expected to be usable; (c) Residual/Scrap Value — estimated disposal value at end of useful life; (d) Depreciable Amount — Cost minus Residual Value.
Straight Line Method (SLM)
Under SLM (also called Fixed Instalment Method), an equal amount of depreciation is charged every year throughout the useful life of the asset. The depreciation charge remains constant year after year.
Written Down Value Method (WDV)
Under WDV (also called Diminishing Balance Method), depreciation is calculated as a fixed percentage of the book value (written down value) at the beginning of each year. Since the book value decreases each year, the depreciation amount also decreases progressively.
Depreciation for Year n = WDV at beginning of year × Rate%
Rate (WDV) = 1 - (Residual Value / Cost)^(1/n) × 100
SLM vs WDV — Detailed Comparison
| Parameter | SLM (Straight Line) | WDV (Written Down Value) |
|---|---|---|
| Depreciation Amount | Equal every year | Higher in initial years, decreases over time |
| Calculated On | Original cost | Book value (WDV) at start of year |
| Book Value | Reduces to zero/scrap value | Never reaches zero (approaches residual) |
| Total Depreciation | Same as WDV over life | Same as SLM over life |
| Tax Benefit | Spread evenly | Higher in early years (tax advantage) |
| Used When | Uniform wear and tear (buildings, furniture) | Rapid obsolescence (IT equipment, vehicles) |
| Income Tax Act | Not allowed | Mandated for tax purposes |
Solved Example — SLM
Given: Machine cost = ₹5,00,000, Residual value = ₹50,000, Useful life = 10 years
Solution:
- Annual Depreciation = (₹5,00,000 - ₹50,000) / 10 = ₹45,000 per year
- Rate of Depreciation = (₹45,000 / ₹5,00,000) × 100 = 9%
- Book Value after Year 3 = ₹5,00,000 - (3 × ₹45,000) = ₹3,65,000
Solved Example — WDV
Given: Machine cost = ₹5,00,000, WDV depreciation rate = 20%
Solution:
- Year 1: Depreciation = ₹5,00,000 × 20% = ₹1,00,000. WDV = ₹4,00,000
- Year 2: Depreciation = ₹4,00,000 × 20% = ₹80,000. WDV = ₹3,20,000
- Year 3: Depreciation = ₹3,20,000 × 20% = ₹64,000. WDV = ₹2,56,000
Note: Depreciation decreases each year under WDV, providing higher tax benefit in initial years.
Accounting Entries
The journal entry for recording depreciation is: Debit: Depreciation Account (Expense) | Credit: Asset Account (or Credit: Accumulated Depreciation Account under the provision method). At year-end, depreciation is transferred to Profit & Loss account: Debit: P&L Account | Credit: Depreciation Account. The accumulated depreciation appears on the Balance Sheet as a deduction from the gross value of the asset.
Key Points for JAIIB Exam
- • SLM: Equal depreciation each year, based on original cost
- • WDV: Decreasing depreciation, based on written-down value
- • Income Tax Act allows only WDV method (except power generating companies)
- • Companies Act / Ind AS allows both SLM and WDV
- • Depreciation is a non-cash expense — add back in cash flow statement
- • Under WDV, book value never reaches zero
- • Schedule II of Companies Act 2013 specifies useful life of assets
Sample MCQs for JAIIB AFM
Q1. An asset costs ₹2,00,000 with a residual value of ₹20,000 and useful life of 9 years. Annual depreciation under SLM is:
- (a) ₹20,000
- (b) ₹22,222
- (c) ₹18,000
- (d) ₹25,000
Answer: (a) — Depreciation = (₹2,00,000 - ₹20,000) / 9 = ₹1,80,000 / 9 = ₹20,000 per year.
Q2. Under WDV method at 25% rate, if opening WDV is ₹4,00,000, depreciation for the year is:
- (a) ₹80,000
- (b) ₹1,00,000
- (c) ₹1,25,000
- (d) ₹75,000
Answer: (b) — WDV depreciation = ₹4,00,000 × 25% = ₹1,00,000. New WDV = ₹4,00,000 - ₹1,00,000 = ₹3,00,000.
Q3. Which method of depreciation is mandated under the Income Tax Act?
- (a) Straight Line Method
- (b) Written Down Value Method
- (c) Units of Production Method
- (d) Sum of Years Digits Method
Answer: (b) — The Income Tax Act mandates WDV method for calculating depreciation for tax purposes (except for power generating undertakings which can use SLM).