Depreciation under Companies Act, 2013
Depreciation under Companies Act, 2013 – Practical Guide on WDV Method, SLM, Useful Life & Calculation
Depreciation is one of the most significant accounting concepts under the Companies Act, 2013. Every company having fixed assets is required to charge depreciation appropriately in its books of accounts so that financial statements reflect a true and fair view of the financial position of the company.
In practical experience, many businesses and accounting professionals face confusion regarding:
Written Down Value (WDV) Method
Straight Line Method (SLM)
Useful life of assets
Residual value
Accumulated depreciation
Depreciation formulas
Difference between Companies Act and Income Tax depreciation
Legal Provision Governing Depreciation
Depreciation under Companies Act is governed by:
Section 123 of the Companies Act, 2013
Schedule II of the Companies Act, 2013
Schedule II mainly prescribes:
Useful life of assets
Residual value concept
Method of depreciation
The depreciation provisions under Schedule II became applicable from 01.04.2014 replacing earlier Schedule XIV of the Companies Act, 1956.
Assets existing on the transition date were required to be depreciated based on remaining useful life prescribed under Schedule II.
What is Depreciation?
Depreciation means systematic allocation of depreciable amount of an asset over its useful life.
In simple words, depreciation represents reduction in value of fixed assets due to:
wear and tear,
usage,
obsolescence,
technological changes, or
passage of time.
Example:
If machinery is purchased for ₹10,00,000, its value and utility gradually reduce over the years. Such reduction is recognised through depreciation.
Meaning of Useful Life
Useful life means the estimated period during which an asset is expected to be available for use by the company.
Examples:
| Asset | Useful Life |
|---|---|
| Computers & Servers | 3 Years |
| Plant & Machinery | 15 Years |
| Furniture & Fittings | 10 Years |
| Motor Cars | 8 Years |
Schedule II provides indicative useful life for various categories of assets.
Meaning of Residual Value
Residual value means estimated realizable value of an asset at the end of its useful life.
As per Schedule II:
Residual value of an asset shall generally not exceed 5% of original cost of the asset.
Example:
Machinery Cost = ₹10,00,000
Residual Value @5% = ₹50,000
Meaning of Depreciable Value
Depreciable value means the amount on which depreciation is required to be calculated.
Formula:
Depreciable Value = Original Cost – Residual Value
Example:
Cost = ₹5,00,000
Residual Value = ₹25,000
Depreciable Value = ₹4,75,000
Meaning of Accumulated Depreciation
Accumulated depreciation means total depreciation charged on an asset till a particular date.
Practical Example under WDV Method (Computer Asset):
| Year | Opening WDV | Depreciation | Closing WDV |
|---|---|---|---|
| 1 | ₹1,00,000 | ₹40,000 | ₹60,000 |
| 2 | ₹60,000 | ₹24,000 | ₹36,000 |
| 3 | ₹36,000 | ₹14,400 | ₹21,600 |
Accumulated depreciation after 3 years = ₹78,400
Meaning of Book Value / Carrying Amount
Book value means value of asset appearing in books after reducing accumulated depreciation.
Formula:
Book Value = Original Cost – Accumulated Depreciation
Methods of Depreciation under Companies Act
Generally, companies use either:
Written Down Value Method (WDV)
Straight Line Method (SLM)
Both methods are permitted under Companies Act subject to proper disclosure and consistent application.
WDV Method – Most Commonly Followed Method in India
In practical corporate environment, a large number of companies in India generally follow the Written Down Value (WDV) Method.
Under WDV method:
depreciation is charged on reducing balance every year,
higher depreciation is charged in initial years,
lower depreciation is charged in later years.
This method is widely preferred because most assets generally provide higher utility in initial years.
Further, repair and maintenance expenses usually increase in later years. Therefore, WDV method provides better matching of asset utility and cost allocation.
Which Companies Commonly Use WDV Method?
WDV method is commonly followed by:
Manufacturing companies
Industrial undertakings
Engineering companies
Transport businesses
Construction companies
Heavy machinery industries
Asset intensive businesses
In practical industry experience, WDV method is more commonly observed than SLM method.
SLM Method – Where Commonly Used?
Under Straight Line Method (SLM), equal depreciation is charged every year throughout the useful life of the asset.
SLM is generally preferred where:
asset utility remains substantially uniform,
stable profit reporting is preferred,
assets do not lose value rapidly in initial years.
SLM is commonly observed in:
IT companies
Software companies
Consulting firms
Service sector entities
Certain infrastructure businesses
Companies following specific international/group reporting practices
Is SLM Compulsory for Any Company?
Generally, Companies Act does not compulsorily prescribe SLM for any specific class of companies merely based on industry.
A company may adopt either:
WDV Method, or
SLM Method
provided:
method reflects true and fair view,
method is consistently followed,
proper disclosures are made in financial statements.
Thus, selection of depreciation method is primarily an accounting policy decision based on nature and usage pattern of assets.
Straight Line Method (SLM) – Formula
Annual Depreciation = (Cost – Residual Value) ÷ Useful Life
Example:
Cost = ₹10,00,000
Residual Value = ₹50,000
Useful Life = 10 Years
Depreciation:
(₹10,00,000 – ₹50,000) ÷ 10 = ₹95,000 per year
WDV Method – Formula
Depreciation = Opening WDV × Depreciation Rate
Under WDV method, depreciation is calculated on reducing balance every year.
Formula for Deriving WDV Rate
Where useful life and residual value are known, equivalent WDV rate may be derived using following formula:
R = (1 – nth root of (S/C)) × 100
Where:
R = WDV Rate
S = Residual Value
C = Original Cost
n = Useful Life
This formula is practically useful for converting useful life concept into equivalent WDV percentage.
Practical Example of WDV Calculation
Suppose:
Machinery Cost = ₹10,00,000
Residual Value = ₹50,000
Useful Life = 15 Years
Derived WDV Rate = Approx. 18.10%
| Year | Opening WDV | Depreciation | Closing WDV |
|---|---|---|---|
| 1 | ₹10,00,000 | ₹1,81,000 | ₹8,19,000 |
| 2 | ₹8,19,000 | ₹1,48,239 | ₹6,70,761 |
| 3 | ₹6,70,761 | ₹1,21,413 | ₹5,49,348 |
Under WDV method, depreciation amount gradually reduces every year.
Common Asset Categories & Useful Life under Schedule II
| Asset Category | Useful Life |
|---|---|
| Buildings (Other than Factory Buildings) | 60 Years |
| Factory Buildings | 30 Years |
| Plant & Machinery | 15 Years |
| Furniture & Fittings | 10 Years |
| Office Equipment | 5 Years |
| Computers & Servers | 3 Years |
| Motor Cars | 8 Years |
| Electrical Installations | 10 Years |
Useful life may vary depending upon nature and usage of asset.
Depreciation on Assets Purchased During the Year
Where asset is purchased during the financial year, depreciation is generally charged proportionately based on period for which asset is available for use.
Therefore, date of capitalization and date when asset is put to use become important from accounting perspective.
Component Accounting under Companies Act
Where significant parts of an asset have different useful life, such components may require separate depreciation.
Examples include:
Aircraft engines
Major machinery components
Specialized industrial equipment
This concept is commonly referred to as component accounting.
Difference between Companies Act and Income Tax Depreciation
| Particulars | Companies Act | Income Tax Act |
|---|---|---|
| Basis | Useful Life | Prescribed Rate |
| Method | SLM / WDV | Mostly WDV |
| Asset Wise / Block Wise | Asset Wise | Block Wise |
| Purpose | Financial Reporting | Tax Computation |
Therefore, book depreciation and income tax depreciation may differ substantially.
Can Company Change Method of Depreciation?
Yes. A company may change depreciation method where required.
However:
change should be properly justified,
proper accounting treatment should be followed,
suitable disclosure should be made in financial statements.
Important Practical Points
Land is generally not depreciated.
Residual value normally should not exceed 5%.
Depreciation cannot reduce carrying amount below residual value.
Even loss-making companies are generally required to charge depreciation.
Fully depreciated assets may continue to remain in use.
Technical assessment may justify different useful life in appropriate cases.
Download Depreciation Calculator in Excel
For practical convenience, we have also prepared a depreciation calculator utility containing:
WDV calculation
Useful life computation
Residual value adjustment
Accumulated depreciation
Closing WDV working
๐ Download Excel Utility Here: [DEPRECIATION AUTO CALCULATION SHEET]
Conclusion
Depreciation under Companies Act, 2013 is an important compliance as well as financial reporting requirement.
Although both SLM and WDV methods are permitted under law, in practical corporate environment, WDV method is more commonly followed by a large number of companies, particularly manufacturing and asset-intensive businesses.
Selection of depreciation method should always be based on actual pattern of consumption of economic benefits derived from the asset and should present a true and fair view of financial statements.
Proper understanding of useful life, residual value, depreciable amount and depreciation methods helps businesses maintain accurate books of accounts and avoid reporting inconsistencies during audit and financial statement preparation.
Disclaimer
The contents of this article are intended solely for informational and educational purposes. Although due care has been taken while preparing this article, readers are advised to examine relevant provisions of the Companies Act, 2013, Schedule II, applicable accounting standards and other relevant laws before taking any decision. The views expressed are general in nature and may not be suitable for every factual situation. The author shall not be responsible for any loss arising from reliance placed on this article without professional consultation.
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