60 Important Depreciation Questions & Answers For Interview

Table of Contents

• List Of Important Depreciation Questions & Answers For Interview
• Statutory Framework: Companies Act vs. IT Act
• Calculation Methods & Formulas
• Financial Statement & Cash Flow Impact
• Technical Terminology & Rules

List Of Important Depreciation Questions & Answers For Interview

1. What Is Depreciation? It is the systematic allocation of a tangible fixed asset's cost (less residual value) over its estimated useful life. It reflects consumption of economic benefits from wear and tear, obsolescence, or effluxion of time.
2. What Are The Main Causes Of Depreciation? Physical deterioration, technological obsolescence, legal/time limits (e.g., leases), and depletion (for extractive assets).
3. Why Is Depreciation Chargeable Even If The Asset Is Not In Use? Assets depreciate due to passage of time, potential obsolescence, or legal limits—even when idle. Accounting standards (Ind AS 16 / AS 10) mandate systematic allocation for a true and fair view.
4. Is Depreciation A Cash Expense? No—it's a non-cash expense. It reduces profit but adds back in cash flow from operations.
5. What Is The Purpose Of Charging Depreciation? Matches costs with revenues (Matching Principle), presents true asset values, complies with prudence, and helps retain funds internally for replacements.
6. Name The Common Methods Of Depreciation? Straight-Line Method (SLM), Written Down Value / Diminishing Balance (WDV), Units of Production, Sum-of-the-Years'-Digits (SYD), and Double Declining Balance (a variant of WDV).
7. Explain The Straight-Line Method Of Calculation For Depreciation? Equal annual charge. Formula: $(Cost - Residual Value) / Useful Life$
8. What Are The Advantages Of The Straight-Line Method? Simple, consistent charge, easy budgeting—suits assets with uniform benefits (e.g., office buildings, furniture).
9. What Are The Disadvantages Of The Straight-Line Method? Ignores higher early productivity or later repair costs; doesn't match accelerated obsolescence in tech assets.
10. Explain Diminishing Balance Method? Fixed % applied to reducing book value each year (WDV method mandatory for tax in India).
11. Why Is The Diminishing Balance Method Called Accelerated Depreciation? Higher charge in early years when asset utility/productivity is maximum.
12. What Is The Formula Of Double Declining Balance Method?$2 \times (Straight-Line Rate) \times Beginning Book Value$ (No residual value considered until end; switch to SLM if needed to reach salvage.)
13. When Is The Units Of Production Method Most Suitable? For usage-based assets like mining equipment, vehicles, or machines where output/mileage drives wear.
14. Explain The Units Of Production Method? Formula: $(Cost - Salvage) \times (Actual Units / Estimated Total Units)$
15. What Is The Salvage Value Or Scrap Value? Estimated net realizable value at end of useful life (after disposal costs). Under Companies Act Schedule II, generally ≤5% of cost unless justified.
16. What Is The Useful Life Of An Asset? Period asset expected to be usable (economic/ technical factors). Schedule II prescribes indicative lives (e.g., general plant & machinery: 15 years).
17. What Is Accumulated Depreciation? Contra-asset account showing total depreciation to date; subtracted from gross cost for net book value.
18. How Is Depreciation Recorded In Journal Entry? Dr. Depreciation Expense A/c Cr. Accumulated Depreciation A/c (preferred) or directly Cr. Asset A/c (older practice).
19. Where Does Depreciation Appear In Financial Statements?
    • P&L: Operating/Administrative expense.
    • Balance Sheet: Deducted from PPE gross block → Net Block.
    • Cash Flow: Added back to net profit (indirect method, operating activities).
20. Does Depreciation Affect Cash Flow? No direct outflow; indirect benefit via tax shield (lower taxable income → lower tax paid → higher net cash).
21. How Does A Rs.10 Increase In Depreciation Affect The Three Financial Statements (Assume 30% Tax Rate)?
    • P&L: Expense ↑ Rs.10 → Profit before tax ↓ Rs.10 → Tax ↓ Rs.3 → Net Income ↓ Rs.7.
    • Cash Flow: Net profit ↓ Rs.7 but add back depreciation Rs.10 → Operating cash ↑ Rs.3 (tax shield).
    • Balance Sheet: Assets ↓ Rs.10 (higher accum. dep.), Cash ↑ Rs.3 (tax savings), Equity ↓ Rs.7 (retained earnings).
22. Why Is Land Not Depreciated? Indefinite useful life; doesn't wear out or become obsolete (except in rare cases like quarries).
23. What Is The Difference Between Depreciation & Amortization? Depreciation: Tangible fixed assets. Amortization: Intangible assets (e.g., patents, software) over finite life.
24. What Is Depletion? Systematic allocation for wasting natural resources (e.g., oil, mines) based on extraction.
25. Can Depreciation Methods Be Changed? Yes—as a change in estimate (Ind AS 8 / AS 5); applied prospectively (no retrospective restatement).
26. What Is Impairment Of Assets? Write-down when carrying amount > recoverable amount (higher of fair value less costs to sell or value in use); Ind AS 36 / AS 28.
27. What Is A Fully Depreciated Asset? Net book value = residual value; stays on books at residual until sold/discarded (no further depreciation).
28. How Do You Account For Disposal Of A Depreciated Asset? Remove gross cost and accum. dep. from books; recognize gain/loss = proceeds - net book value in P&L.
29. If An Asset Is Sold For More Than Book Value Then What Is It? Gain on sale (other income in P&L); if below, loss.
30. How Does Impairment Differ From Depreciation? Depreciation: Regular, predictable allocation. Impairment: One-time, triggered by indicators (e.g., damage, market decline).
31. What Is Provision For Depreciation? Older term for accumulated depreciation; accumulates charges while asset remains at historical cost.
32. Why Provide Depreciation On Assets? Prudence concept—avoid profit overstatement; true & fair view (Section 129, Companies Act).
33. Is Depreciation Mandatory For Accounting Standards? Yes—Ind AS 16 / AS 10 requires for all depreciable assets to reflect true consumption.
34. What Are Revaluation Models For Assets? Ind AS option: Carry at revalued amount (fair value) less subsequent depreciation/impairment; revalue regularly.
35. Does Revaluation Affect Depreciation? Yes—future depreciation based on revalued amount over remaining useful life.
36. What Is Component Depreciation? Mandatory under Companies Act 2013—depreciate major components separately if different useful lives (e.g., building structure vs. lifts).
37. When Is Component Depreciation Required? When parts have materially different patterns of benefit consumption.
38. What Is Bonus Depreciation? In India: Additional Depreciation u/s 32(1)(iia)—20% of actual cost in first year for new plant/machinery in manufacturing/production/power (if put to use; half if <180 days). Continues under new IT Act 2025.
39. Why Tax Depreciation Differs From Book Depreciation? Tax: Fixed rates on blocks (policy-driven incentives). Books: Useful life-based (economic reality). Leads to timing differences → deferred tax.
40. What Is Matching Principle In Relation To Depreciation? Asset cost allocated to periods benefiting from its use.
41. How Do You Calculate Depreciation If An Asset Purchased In Mid-Year?
    • Books: Pro-rata (e.g., months/days held).
    • Tax: 180-day rule—full rate if put to use ≥180 days; 50% if <180 days in acquisition year.
42. What Is The Sum Of Years Digit Method? Accelerated: Fraction = (Remaining years / Sum of years) × Depreciable amount.
43. Why Use Accelerated Depreciation Method? Matches higher early benefits; tax incentives; offsets rising later maintenance.
44. What Happens To Depreciation If Useful Life Is Revised? Prospective: Remaining depreciable amount spread over new remaining life.
45. Can Depreciation Be Negative? No—cannot increase asset value (except revaluation surplus in OCI under Ind AS).
46. How Is Depreciation Treated In Cash Flow Statement? Added back to net profit in operating activities (indirect method)—non-cash.
47. What Is A Fixed Asset Register? Detailed record: Cost, purchase date, location, depreciation schedule, disposal—ensures control & reconciliation.
48. Why Do You Need To Reconcile Fixed Assets Periodically? Verify existence, detect theft/loss, ensure books match physical assets.
49. What Is Capitalized Interest In Relation To Assets? Borrowing costs on qualifying assets (e.g., construction) added to cost until ready (Ind AS 23 / AS 16).
50. Explain The Cost Principle In Asset Depreciation. Initial recognition at historical cost (purchase + attributable costs like installation, freight).
51. What Is Depreciable Amount? Cost (or revalued amount) minus residual value.
52. What Is Residual Value? Estimated disposal proceeds (net of costs). Companies Act: ≤5% unless technically justified.
53. What Is Carrying Amount? Net book value = Cost/Revalued - Accum. Dep. - Impairment.
54. What Is Written Down Value (WDV)? Book value after depreciation; basis for tax depreciation on blocks.
55. What Is Book Value? Carrying amount on balance sheet.
56. What Is Depreciation Under Companies Act? Based on useful life in Schedule II (indicative); methods SLM/WDV/UOP; component accounting mandatory; residual ≤5%.
57. What Is Depreciation Under Income Tax Act? Section 32: WDV on block of assets at prescribed rates; mandatory put to use; additional 20% for new manufacturing assets.
58. What Is Block Of Assets? Group of similar assets (e.g., all plant & machinery at 15%)—additions/reductions adjust block WDV.
59. What Happens If An Asset Is Not Used During The Year?
    • Books: Still charged (time-based decay).
    • Tax: No depreciation unless "put to use" during the year.
60. What Is Partial Year Depreciation? Pro-rata calculation for books; 180-day rule for tax.

Statutory Framework: Companies Act vs. IT Act

Popular Tax Depreciation Rates (FY 2025-26 / AY 2026-27 – Unchanged Core Rates)

• Buildings (Residential): 5%
• Buildings (Non-residential): 10%
• Furniture & Fittings: 10%
• Plant & Machinery (general): 15%
• Computers & Software: 40%
• Intangibles: 25%
• Motor Cars (not for hire): 15%
• Additional Depreciation: 20% (first year, new manufacturing plant/machinery)

Conclusion

Mastering these nuances is the hallmark of a Certified Corporate Accounting professional. Whether you are managing complex entries in SAP FICO (Finance & Controlling) or ensuring compliance in Taxation (Income Tax & GST), understanding the bridge between books and tax is vital. If you are looking for the best accounting institute in Kolkata to sharpen these skills, ensure their accounting course covers Ind AS and the latest Finance Acts. For those seeking the best taxation course in Kolkata, look for hands-on numerical practice like the one above at a reputable accounting institute in Kolkata.