Depreciation Methods: JAIIB AFM 2026 Full Guide

Depreciation methods are a core numerical topic in the JAIIB AFM paper, and candidates who master them can score confidently in the accounting section. Depreciation is the systematic allocation of the cost of a tangible fixed asset — less its residual value — over its useful life, reflecting wear and tear, obsolescence and the passage of time. It is a non-cash charge to the profit and loss account, yet it directly affects reported profit, tax and the carrying value of assets on the balance sheet. This 2026 guide walks through the main depreciation methods, shows worked numericals in the style examiners set, and connects everything to AS-10 so you can answer both theory and calculation questions.

Why Depreciation Matters and How It Is Defined

Depreciation exists because the matching principle requires the cost of a long-lived asset to be spread across the periods that benefit from its use, rather than charged entirely in the year of purchase. For bankers analysing a borrower's financials, understanding depreciation is essential — it explains the gap between profit and cash flow, and it influences ratios such as return on assets. Three quantities drive every depreciation calculation:

• Cost of the asset — purchase price plus all costs to bring it to working condition (installation, freight, non-refundable taxes).
• Residual (scrap) value — the estimated amount recoverable at the end of the useful life.
• Useful life — the period over which the asset is expected to be available for use.

The depreciable amount is cost minus residual value, and it is this figure — not the full cost — that gets allocated over the useful life. Getting these definitions precise prevents silly mistakes in numericals. Build this foundation systematically through the accounting modules of the JAIIB course.

Straight Line vs Written Down Value: The Two Core Methods

The two methods that dominate the exam are the Straight Line Method (SLM) and the Written Down Value (WDV) method, also called the diminishing balance method.

• Straight Line Method: an equal amount is charged every year. Annual depreciation = (Cost − Residual value) ÷ Useful life. The charge is constant, so the asset reaches its residual value at the end of its life. SLM suits assets that give uniform service, such as buildings.
• Written Down Value Method: a fixed percentage is applied each year to the reducing book value. The charge is highest in year one and falls thereafter, matching assets that are most productive when new, such as vehicles and machinery. The asset value theoretically never reaches zero.

A worked example clarifies the difference. Take a machine costing ₹1,00,000 with a residual value of ₹10,000 and a useful life of 5 years. Under SLM the annual charge is (1,00,000 − 10,000) ÷ 5 = ₹18,000 every year. Under WDV at, say, 20%, year one depreciation is ₹20,000, year two is 20% of ₹80,000 = ₹16,000, and so on — a falling charge. Notice SLM gives a higher charge in later years while WDV front-loads it. Practise these patterns until they are automatic on the IIBF practice tests.

Other Depreciation Methods You Must Know

Beyond SLM and WDV, the syllabus expects familiarity with a few specialised methods that appear in objective questions:

• Sum-of-the-Years'-Digits (SYD): an accelerated method where depreciation is weighted by remaining years. For a 5-year asset the digits sum to 15 (5+4+3+2+1); year one charges 5/15 of the depreciable amount, year two 4/15, and so on.
• Units of Production Method: depreciation is based on actual output or usage, so the charge = (Depreciable amount ÷ Total estimated units) × units produced in the period. Ideal for machines whose life depends on usage rather than time.
• Machine Hour Rate Method: a variant that allocates depreciation on the basis of hours the machine runs.
• Depletion Method: used for wasting assets like mines and quarries, where the charge is proportional to the quantity extracted.

Examiners test both the formula and the suitability of each method — for instance, why units-of-production fits a factory machine better than a building. Keep a one-page comparison chart and revise it before the exam. Follow accounting-standard updates on the IIBF news page so you are never caught out by a revision.

AS-10, Change of Method and Companies Act Angle

In India, depreciation accounting for property, plant and equipment is governed by AS-10 (Revised), Property, Plant and Equipment, which replaced the older AS-6. Key points for the exam:

• Depreciation is recognised even if the fair value of the asset exceeds its carrying amount, as long as residual value is below carrying amount.
• The depreciation method should reflect the pattern in which the asset's economic benefits are consumed and must be reviewed at least at each financial year-end; a change is treated as a change in accounting estimate, applied prospectively.
• Significant components of an asset with different useful lives must be depreciated separately — this is component accounting.
• Under the Companies Act, 2013, useful life and residual value are prescribed in Schedule II, and companies may adopt SLM, WDV or the units-of-production method.

You can confirm the standard's current text from the primary authority, the Institute of Chartered Accountants of India. A frequent trap is asking whether a change of method is applied retrospectively — under AS-10 revised it is prospective, as a change in estimate. Reinforce these rules with vocabulary drills on the match-the-concept game and deeper reads on the study blog.

Remember also the distinction between depreciation, amortisation and depletion, which examiners deliberately blur. Depreciation applies to tangible fixed assets, amortisation to intangible assets such as patents and goodwill, and depletion to natural-resource assets like mines. All three follow the same matching logic but use different terminology. Finally, keep the accounting entry clear: depreciation is debited to the profit and loss account and credited either to the asset account directly or to a "Provision for Depreciation" (accumulated depreciation) account under the balance-sheet approach — a favourite one-mark question that trips up candidates who only practised the calculation and never the journal entry.

Frequently Asked Questions

Related study material

Go deeper with the full chapter notes and the complete article hub for this subject:

• Depreciation and its accounting
• Bills of Exchange
• All Accounting and Financial Management for Bankers articles & notes

Conclusion: Convert Formulas into Marks

Depreciation methods reward candidates who combine crisp formulas — SLM, WDV, SYD and units of production — with the theory of AS-10 and the suitability of each method. Work through numericals until the calculations are second nature, then layer on the standard-based theory. Ready to test yourself under exam conditions? Attempt a timed AFM mock on the IIBF practice tests, or strengthen the fundamentals in the JAIIB course today.