Depreciation in accounting: SLM vs WDV, explained simply.

What is depreciation?

Depreciation is the gradual, systematic reduction in the book value of a fixed asset over its useful life, recorded as an expense in the profit & loss account. When a business buys a machine, a vehicle, a laptop or furniture, that asset doesn't help earn revenue for just one year — it helps for several years. Accounting's matching principle says the cost of the asset should be spread across all the years it is used, not dumped as one giant expense in the year of purchase.

So instead of expensing the full ₹5,00,000 cost of a machine on day one, you expense a fair slice of it — say ₹1,12,500 — every year for its useful life. The asset's value on the balance sheet falls each year by exactly that amount.

Why do we depreciate assets? Three reasons

• Matching principle — revenue and the expenses that earned it must be recorded in the same period. A machine used for 4 years should have its cost split across those 4 years, not one.
• True and fair financial position — a 6-year-old delivery van is not worth what you paid for it. Depreciation keeps the balance sheet realistic instead of overstating assets.
• Legal requirement — the Companies Act, 2013 (Schedule II) requires companies to depreciate fixed assets in their books, and the Income Tax Act, 1961 requires depreciation to be computed (on the WDV basis) to arrive at taxable business income.

Depreciation is non-cash — no money leaves the business when you post it. The cash went out when the asset was purchased; depreciation only recognises, period by period, that the asset is being used up.

SLM vs WDV — the two methods compared

The two methods you'll meet in every B.Com and CA Foundation paper are the Straight Line Method (SLM) and the Written Down Value method (WDV), also called the diminishing balance method.

Worked example — a ₹5,00,000 machine, both methods

A manufacturer buys a machine for ₹5,00,000 on 1 April. Estimated useful life is 4 years, with an estimated salvage (scrap) value of ₹50,000 at the end. Let's depreciate it under SLM, and then compare with WDV at 20% p.a.

SLM schedule

Annual depreciation = (₹5,00,000 − ₹50,000) ÷ 4 years = ₹1,12,500 every year.

WDV schedule (rate 20% p.a.)

Each year's depreciation = 20% × that year's opening book value — so the charge shrinks every year.

Notice WDV never reaches ₹50,000 exactly by year 4 — book value is still ₹2,04,800. That's normal: WDV asymptotically approaches zero (or salvage), it doesn't land on it. In practice, WDV rates and periods are prescribed (Companies Act Schedule II or Income Tax rules), and any small remaining balance is written off in the year of sale or scrapping.

The journal entry — same every year, either method

Whichever method you use, the year-end entry to record depreciation looks the same (only the amount changes):

Debit total equals credit total — ₹1,12,500 = ₹1,12,500 — the entry ties out. This single entry does two things at once: it reduces the asset's book value (credit) and creates the depreciation expense (debit). At year end, every expense account — Depreciation A/c included — is itself closed into the Profit & Loss A/c (Profit & Loss A/c Dr. ₹1,12,500, To Depreciation A/c ₹1,12,500) as part of the normal closing-entries process that every expense goes through, not a step unique to depreciation. Either way, only ₹1,12,500 of depreciation expense hits the year's profit — it is not double-counted.

Common mistakes students make

• Applying WDV % to original cost every year instead of the reducing opening balance — this silently turns WDV into a flawed version of SLM. Always apply the rate to this year's opening WDV, not the original cost.
• Forgetting salvage value in SLM — the formula is (Cost − Salvage) ÷ Life, not Cost ÷ Life. Leaving out salvage overstates the annual charge.
• Depreciating land — land is not depreciated (it doesn't wear out); only the building on it is.
• Treating depreciation as a cash expense — it isn't. That's why it gets added back to profit in a cash flow statement.
• Mixing up book depreciation and tax depreciation — a company can use SLM in its books but must still compute WDV-based depreciation separately for its income tax return. The difference creates deferred tax, not an error.
• Forgetting the pro-rata rule for part-year purchases — if an asset is bought partway through the year, most rules require depreciation only for the number of days/months it was actually used in that year, not a full year's charge.

In TatvaBooks, this happens automatically

Working out depreciation schedules by hand is exactly the kind of arithmetic accounting software should own. In TatvaBooks, you record the asset once — cost, useful life, method (SLM or WDV) and rate — and depreciation posts itself every period: the journal entry above is generated automatically, the fixed asset register stays current, and your P&L and balance sheet always reflect the correct written-down value. No spreadsheet, no manual year-end entry to remember.

Want to see the maths first? Try our free depreciation calculator — enter cost, salvage value, life and method to get the full year-by-year schedule instantly.

Frequently asked questions