Every physical asset wears out over time. A machine bought today will not function — or sell — for the same price ten years later. Depreciation is the systematic process of allocating the cost of a tangible fixed asset over its useful life. It is not a cash payment; it is an accounting entry that matches the expense of using an asset to the revenue it helps generate. This is the matching principle in action.
Think of it like a mobile phone. You buy it for ₹30,000. By year three, it is worth maybe ₹10,000. That ₹20,000 reduction in value happened gradually — depreciation is how accountants capture that reduction year by year in the books.
Inventory valuation is a separate but equally important topic. A business buys raw materials or goods at different prices over time. When it sells goods, which cost do you charge to the Profit & Loss account — the oldest purchase price, the newest, or some average? The method you choose directly affects your reported profit and the value of closing stock on the Balance Sheet.
Look — in SSC CGL Finance and Accounts, these two topics almost always appear together because both deal with asset measurement and both directly affect the financial statements. The examiner tests whether you can distinguish methods, apply formulas quickly, and identify the impact each method has on profit.
Here is a grounding analogy: depreciation is like eating a loaf of bread slice by slice (the cost of the whole loaf is consumed over time), while inventory valuation is deciding which slice you eat first — the one you bought yesterday or the one from last week.
Also called the Fixed Instalment Method (समान किश्त विधि in Indian classrooms).
Formula:
Annual Depreciation = (Cost of Asset − Scrap Value) / Useful Life
Depreciation Rate % = (Annual Depreciation / Cost) × 100
The key feature: the same rupee amount is charged every year. The book value decreases in a straight line from cost to scrap value.
When the examiner gives you: Cost, Scrap Value (or Residual/Salvage Value), and Useful Life — use SLM.
Example: Machine cost ₹1,20,000, scrap ₹20,000, life 10 years. Depreciation = (1,20,000 − 20,000) / 10 = ₹10,000 per year.
Characteristics of SLM:
Also called Diminishing Balance Method or Reducing Balance Method (ह्रासमान शेष विधि).
Formula:
Depreciation for Year = Book Value at Start of Year × Rate %
Book Value at End of Year n = Cost × (1 − r)^n
where r is the depreciation rate as a decimal.
The key feature: depreciation is higher in early years and reduces progressively. The asset never fully reaches zero book value mathematically (it asymptotically approaches zero).
When the examiner gives you: Cost, Rate %, and asks for book value after n years — use the formula Cost × (1 − r)^n.
Example: Machine cost ₹80,000, rate 25%, after 2 years:
Or directly: 80,000 × (0.75)² = 80,000 × 0.5625 = ₹45,000.
Characteristics of WDV:
An accelerated depreciation method (like WDV) but calculated differently.
Formula:
Sum of Years' Digits (SYD) = n(n+1)/2 where n = useful life
Depreciation for Year t = (Remaining Useful Life at Start of Year t / SYD) × Depreciable Amount
Depreciable Amount = Cost − Scrap Value
Example: Machine cost ₹1,20,000, scrap ₹20,000, life 5 years.
Inventory valuation determines what goes into Cost of Goods Sold (COGS) and what remains as Closing Stock.
The oldest stock is assumed to be sold first. Closing stock is valued at the most recent purchase prices.
In a rising price environment:
The newest stock is assumed to be sold first. Closing stock is valued at the oldest purchase prices.
In a rising price environment:
A single average cost per unit is calculated and applied to both goods sold and closing stock.
Weighted Average Cost = Total Cost of Goods Available / Total Units Available
This method smooths out price fluctuations. It is the most commonly used method in India under AS-2.
| Method | COGS | Closing Stock | Profit | |--------|------|---------------|--------| | FIFO | Lowest | Highest | Highest | | LIFO | Highest | Lowest | Lowest | | Weighted Avg | Middle | Middle | Middle |
When the question asks for book value after n years under WDV, never calculate year by year. Use directly: Book Value = Cost × (1 − r)^n. For rate 20%, (1−0.20) = 0.80. For 3 years: multiply by 0.80 three times mentally — 0.80 × 0.80 = 0.64, × 0.80 = 0.512. So ₹1,00,000 at 20% WDV for 3 years = ₹51,200. Year-by-year method: 6 multiplication steps. Direct formula: 2 steps. Time saved: approximately 30 seconds per question.
For SLM questions, the examiner always gives you Cost, Scrap Value, and Life. The answer is always: (Cost − Scrap) ÷ Life. Train your eye to spot these three numbers and divide immediately. For ₹1,20,000 cost, ₹20,000 scrap, 10 years life: (1,20,000 − 20,000) = 1,00,000 ÷ 10 = ₹10,000. One subtraction, one division. Standard reading-plus-formula approach takes 45 seconds; this pattern recognition takes under 10 seconds.
For SYD, the fraction for any year t is: (n − t + 1) / SYD. You do not need to build the full table. For a 5-year asset, Year 3 fraction = (5 − 3 + 1) / 15 = 3/15. The numerator is simply the remaining life at the start of that year. Memorise: "Remaining Life over SYD." This eliminates the need to write out all fractions — saves 4 steps compared to building the full depreciation schedule.
When the question asks which method gives higher profit in a period of rising prices, eliminate LIFO immediately — it charges recent higher costs first, suppressing profit. FIFO charges old lower costs, inflating profit. The trigger phrase is "rising prices" → FIFO = higher profit. If the question says "falling prices," reverse the logic. This binary elimination works on every FIFO/LIFO comparison question — standard approach of tracing through numbers takes 60 seconds; trigger-word recognition takes 5 seconds.
For the very common 25% WDV rate questions: (1 − 0.25) = 0.75. Memorise 0.75^2 = 0.5625 and 0.75^3 = 0.421875. For a ₹80,000 machine at 25% after 2 years: 80,000 × 0.5625 = ₹45,000 (directly). For the 20% rate: 0.80^2 = 0.64, 0.80^3 = 0.512. Keeping these squares and cubes memorised converts a 3-step iterative calculation into a single multiplication.
Read the question and identify the method being tested before touching numbers.
Step 1 — Identify the method:
Step 2 — Apply the direct formula:
Step 3 — Sanity check:
Watch out for: questions that give you Rate% under SLM — that means (Annual Depreciation / Cost) × 100, not on depreciable amount. Re-read whether rate is "on cost" or "on WDV."
Why this question: The SLM formula is the single most-tested depreciation concept in SSC CGL Finance papers. This is a direct one-formula question — if you fumble here, it costs you an easy mark.
Solving path: Identify: Cost = ₹1,20,000, Scrap = ₹20,000, Life = 10 years. Apply SLM formula: (1,20,000 − 20,000) / 10 = 1,00,000 / 10 = ₹10,000. Option D. Time: under 15 seconds.
Why this question: WDV after two years tests whether you can apply the reducing balance correctly. The trap is applying 25% on the original cost in Year 2 instead of the Year 1 closing balance.
Solving path: Use direct formula: 80,000 × (0.75)^2 = 80,000 × 0.5625 = ₹45,000. Option B. Alternatively: Year 1 WDV = 80,000 − 20,000 = 60,000; Year 2 depreciation = 60,000 × 25% = 15,000; Year 2 WDV = 60,000 − 15,000 = ₹45,000. Time: 20 seconds using direct formula.
Why this question: SYD is less frequently tested but is a favourite for "surprise" questions. The key is computing the correct fraction for the specific year asked.
Solving path: Depreciable amount = 1,20,000 − 20,000 = ₹1,00,000. SYD = 5×6/2 = 15. Year 3 remaining life = 3, so fraction = 3/15 = 1/5. Depreciation = (1/5) × 1,00,000 = ₹20,000. Option A. Time: 30 seconds.
Why this question: This question requires WDV over 3 years with a realistic asset cost. It tests whether you can chain the multiplication cleanly or use the direct formula. Note the date context — April 2020 to March 2023 is exactly 3 financial years, no partial-year trap here.
Solving path: Rate = 20%, so multiplier = 0.80. After 3 years: 5,00,000 × (0.80)^3 = 5,00,000 × 0.512 = ₹2,56,000. Option A. If you don't remember 0.80^3 = 0.512: Year 1 = 5,00,000 × 0.8 = 4,00,000; Year 2 = 4,00,000 × 0.8 = 3,20,000; Year 3 = 3,20,000 × 0.8 = 2,56,000. Time: 25 seconds using direct formula.
Why this question: Another WDV three-year question but with a different starting cost. Tests pattern recognition — if you noticed the 20% WDV pattern from the previous question, this should take under 20 seconds.
Solving path: 1,00,000 × (0.80)^3 = 1,00,000 × 0.512 = ₹51,200. Option C. Do not be distracted by ₹64,000 (which is the Year 2 book value — a classic decoy). Time: 10 seconds if you have memorised 0.80^3 = 0.512.
Applying depreciation rate on original cost under WDV. This is the most common error. Under WDV, the rate applies to the book value at the start of each year, not the original cost. Only under SLM is original cost used (and even there, you subtract scrap value first).
Forgetting to subtract scrap value before dividing in SLM. The formula is (Cost − Scrap) / Life, not Cost / Life. If scrap value is ₹20,000 and you skip the subtraction, your answer will be inflated and will match a wrong option the examiner has deliberately placed.
Using the wrong year count for SYD. The fraction numerator for Year t is the remaining life at the start of Year t, which equals (n − t + 1). Students often write (n − t), missing the "+1" and getting the fraction for the wrong year.
Confusing WDV rate with SLM rate. A question might say "depreciated at 10% per annum" — you must check whether it says "on cost" (SLM) or "on WDV" / "on reducing balance" (WDV). Misidentifying the method flips your entire approach.
FIFO closing stock equals most recent purchases — not always the last batch alone. When units sold are fewer than the latest batch, only part of the latest batch is used. Students sometimes assign only the last purchase to closing stock regardless of quantity. Always trace units carefully.
Assuming LIFO is permitted under Indian accounting standards. AS-2 (Valuation of Inventories) explicitly prohibits LIFO in India. If a conceptual question asks "which method is NOT permitted under AS-2," the answer is LIFO. Do not confuse theoretical knowledge of LIFO with its practical applicability in India.