Depreciation in Accounting: JAIIB AFM Notes, Methods, Formula & Journal Entries

Depreciation in Accounting: The Complete JAIIB AFM Guide for 2026

Everything you need on depreciation in accounting for the JAIIB Accounting &. Financial Management for Bankers (AFM) paper — meaning. Causes, methods, formula, journal entries and exam traps — explained in plain English.

If there is one topic from Module A of the JAIIB AFM syllabus that quietly decides your score. It is depreciation in accounting. It looks simple.

Then the exam hands you a tricky Written Down Value sum. A half-year usage twist. Or a journal entry, and easy marks slip away.

This 2026 guide fixes that. We rebuild the concept from the ground up — what depreciation means. Why it exists.

How to calculate it, and how to pass the entries. Every factual point your IIBF study material covers is here. Sharpened and exam-ready.

By the end. You will not just recognise depreciation questions. You will solve them quickly and confidently. Let us begin.

What Is Depreciation in Accounting?

Depreciation in accounting is an expense charged to the Profit. Loss Account. The value of a fixed asset falls every year as it is used. In simple words. Assets lose value over time, and depreciation records that loss.

Think of a delivery van bought by a bank's branch. Each year it runs, its parts wear out and its worth drops. Depreciation is the accounting way of spreading that drop across the years the van is useful.

Key Characteristics of Depreciation

Your AFM notes list a few defining features. Remember these — examiners love one-line factual questions on them.

• It forms a part of the operating cost of the business.
• It causes a reduction in the value of the asset.
• This reduction happens because of use — wear and tear or other reasons.
• The reduction is continuous and regular, year after year.

A quick clarification: depreciation applies to tangible fixed assets (machinery. Furniture, vehicles, buildings). For intangible assets like goodwill or patents. The matching concept is called amortisation — a favourite distractor in MCQs.

Causes and Need for Depreciation

To answer theory questions cleanly. Separate the causes (why an asset loses value) from the need (why we must record it). The table below makes this crystal clear.

Why does the need column matter so much? Because if you skip depreciation. Profit looks higher than it really is. And the balance sheet shows assets at an inflated value. Both mislead stakeholders — exactly what sound accounting must prevent.

Data Needed to Calculate Depreciation

Before any formula, you need three inputs. Miss one and the whole sum collapses.

1. The actual cost of the asset (including installation and bringing-to-use costs).
2. The estimated useful life. The number of years it will be in use.
3. The estimated scrap (residual) value. What it will fetch when sold at the end of its life.

Methods of Calculating Depreciation in JAIIB AFM

Different organisations use different methods. The JAIIB AFM 2026 syllabus focuses on three. Learn what each one means and where it fits.

In short: SLM is also called the fixed instalment or fixed percentage on original cost method. WDV is also called the reducing instalment or diminishing balance method. The Sum of Years' Digits method is a second accelerated approach.

The full list of methods. Marks. Weightage should always be confirmed on the latest official IIBF notification.

Straight Line Method (SLM) Explained

Under the Straight Line Method. The cost of the asset is written off in equal amounts over its useful life. The same depreciation is charged every year until the asset's value becomes nil or equal to its residual value.

Why Is It Called the “Straight Line” Method?

Plot the yearly depreciation against time on a graph. Because the amount is identical each year. The points form a straight line. That is precisely where the name comes from. A neat one-liner that often appears in objective questions.

SLM Formula (Memorise This)

A Quick Worked Example

Suppose a machine costs ₹1,00,000. Has a residual value of ₹10,000 and a useful life of 9 years.

• Annual Depreciation = (1,00,000 − 10,000) ÷ 9 = ₹10,000 per year.
• Rate of Depreciation = (10,000 ÷ 1,00,000) × 100 = 10% per annum.

That ₹10,000 hits the Profit & Loss Account every single year. Simple, predictable, and easy to verify — the hallmark of SLM.

Suitability of SLM

SLM works best for leases. For assets where the useful life. Residual value can be estimated accurately. When you can predict the asset's behaviour. An equal yearly charge is both fair and simple.

SLM and the Period of Use

If an asset is used for only part of a year. Depreciation is charged only for that period. For example. If a machine is used for just 4 months in a year. You charge depreciation for 4 months — not the full year.

Advantages of SLM

• It is very easy to calculate.
• It is easy to understand. With no variation in the yearly charge (unless the asset is used for less than a year).

Disadvantages of SLM

The charge stays equal every year. But repair and renewal expenses keep rising as the asset ages. So the total burden (depreciation + repairs) charged to the P&L A/c grows in later years. Even though depreciation alone did not change. This is the classic criticism of SLM.

Accounting Entries for Depreciation

JAIIB loves journal-entry questions. There are three entries you must pass perfectly. Learn the narration too — it earns marks in descriptive papers.

How Depreciation Appears in the Financial Statements

Two effects to remember:

• The Depreciation A/c (an expense) goes to the debit side of the Profit &. Loss Account. Reducing net profit.
• The asset appears at its reduced (written-down) value in the year-end Balance Sheet.

So depreciation is one of those rare items that touches both the P&L Account. The Balance Sheet simultaneously. Worth stating in theory answers.

The Practical Reality of Straight-Line Depreciation

SLM is the easiest method. Can be applied to almost all long-term assets. But “easy” does not always mean “accurate.” Sometimes an equal yearly charge fails to reflect how an asset is actually consumed.

Take a computer. Technology moves fast. So a machine can become obsolete in two or three years.

SLM. However. Assumes the computer is equally useful across its whole estimated life.

Spreads depreciation evenly. That assumption is unrealistic here. Which is exactly why WDV or another accelerated method often suits fast-ageing assets better.

The lesson: choose the method that matches how the asset loses value. Examiners reward students who can justify why a method fits a situation. Not just recite the formula.

How to Study Depreciation for JAIIB AFM (Step-by-Step)

Knowing the theory is half the battle. Here is a focused, repeatable study plan to lock in the marks.

1. Nail the definition and characteristics first. One-liners are guaranteed MCQ fuel.
2. Memorise the two SLM formulas. Solve five numericals by hand until they feel automatic.
3. Compare SLM vs WDV side by side. Most tricky questions test the difference, not a single method.
4. Practise all three journal entries with narrations, then practise the year-end transfer.
5. Drill the income-tax 180-day rule. It is a classic trap that separates toppers from the rest.
6. Take timed mock tests so you can spot a depreciation question and solve it in under a minute.

Pair this routine with our free guides on the other Module A topics, and your AFM accounting base becomes rock-solid.

Common Mistakes Students Make on Depreciation

Avoid these and you instantly outscore most candidates:

• Forgetting residual value in the SLM formula. It must be subtracted before dividing by life.
• Charging full-year depreciation when the asset was used only part of the year (under accounting rules).
• Mixing up the income-tax half-year rule with normal accounting treatment.
• Confusing SLM with WDV — SLM uses original cost. WDV uses the diminishing balance.
• Calling it amortisation — that term applies to intangible assets, not tangible ones.
• Wrong direction in entries — Depreciation is debited. The Asset A/c is credited.

Frequently Asked Questions (FAQ)

What is depreciation in accounting in simple words?

Depreciation is the gradual fall in the value of a fixed asset due to use. Wear and tear, or the passage of time. It is recorded as an expense in the Profit &. Loss Account so that profit and asset value are stated correctly.

What are the main methods of depreciation in JAIIB AFM?

The JAIIB AFM syllabus focuses on three methods: the Straight Line Method (SLM). The Written Down Value (WDV) method. And the Sum of Years' Digits method. Always confirm the exact coverage on the latest official IIBF notification.

What is the formula for the Straight Line Method?

Annual Depreciation = (Cost of Asset − Net Residual Value) ÷ Useful Life. The rate of depreciation = (Annual Depreciation ÷ Cost of Asset) × 100.

What is the difference between SLM and WDV?

SLM charges a fixed amount every year on the original cost. So depreciation stays constant. WDV charges a fixed percentage on the reducing balance. So depreciation is higher in the early years and lower later. WDV is commonly used for income-tax purposes.

Is depreciation a debit or credit?

Depreciation is an expense. So the Depreciation A/c is debited. The Asset A/c is credited.

At year-end. Depreciation is transferred to the Profit &. Loss Account (P&L A/c is debited.

Depreciation A/c is credited).

Final Word: Turn Depreciation Into Guaranteed Marks

Depreciation rewards clarity, not cramming. Once you understand why assets lose value. How each method captures that loss. The numericals and entries become routine — fast, accurate, mark-fetching.

So revise the formula. Master the three entries. Respect the income-tax rule, and drill it under exam conditions.

Do that. And depreciation moves from “tricky topic” to “guaranteed score” on your JAIIB AFM scorecard. You have got this — now go practise.

Related Guides

For more on depreciation in accounting. See the official IIBF circulars. Our chapter-wise free notes on iibf.store.

For more on “depreciation in accounting”, explore our free mock tests and chapter notes on iibf.store.

Bookmark this page — we keep our “depreciation in accounting” guidance current as IIBF revises its rules.

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