Depreciation & its Accounting Notes, Important for JAIIB AFM

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Published on 16 February 2026 by

Depreciation is one of the most important topics for JAIIB, especially under the Accounting and Finance modules. Understanding depreciation helps you accurately calculate the cost of assets over time, match expenses with revenue, and ensure proper financial reporting. In banking and finance, this knowledge is critical because it impacts profit calculation, asset management, and decision-making for fixed asset replacement. In this blog, we have explain the topics related to depreciation and its accounting for the JAIIB AFM 2026 exam.

What is depreciation and why is it important?

Depreciation is the decrease in the value of a tangible fixed asset over its useful life. It is necessary because assets lose value as they are used or become outdated. Accounting for depreciation helps businesses present a true picture of profits and ensures that enough funds are available for asset replacement.

TopicDetails
Meaning of DepreciationDecrease in the value of a fixed asset due to use, wear and tear, or time.
Causes of DepreciationPhysical wear & tear, obsolescence, natural factors, legal or contractual limitations.
Need for DepreciationMatching cost with revenue, correct profit calculation, proper asset valuation, planning for asset replacement.
Factors Affecting DepreciationCost of asset, useful life, residual value, chosen method of depreciation.
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Download the free Depreciation Notes for JAIIB exam.

The link to download the Depreciation notes for the JAIIB AFM 2026 exam is provided below.

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How is depreciation recorded in accounting?

In accounting, depreciation is recorded to reflect the expense of using an asset over time. It reduces the book value of the asset while showing it as a cost in the profit & loss account. Proper entries ensure financial statements are correct and compliant.

TransactionAccounting Entry
Recording depreciationDr Depreciation Expense A/C
Cr Accumulated Depreciation A/C
Transferring to Profit & LossDr Profit & Loss A/C
Cr Depreciation Expense A/C
Sale of assetDr Cash/Bank A/C
Dr Accumulated Depreciation A/C
Cr Asset A/C
Cr/Dr Gain or Loss on Sale A/C

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What are the different methods of depreciation?

Depreciation can be calculated in multiple ways. Each method has its own advantages and is suitable for different types of assets. Here are the main methods:

1. Straight line method (SLM)

This method spreads the cost of the asset equally over its useful life.

DetailsNotes
Formula(Cost – Salvage Value) ÷ Useful Life
AdvantagesSimple, easy to calculate, consistent expense each year
DisadvantagesIgnores actual usage or wear & tear of asset

2. Written down value / Diminishing balance method (WDV)

Here, depreciation is charged on the reducing book value of the asset each year.

DetailsNotes
FormulaBook Value × Depreciation Rate
AdvantagesMatches actual usage better, higher depreciation in early years, tax benefits
DisadvantagesComplex calculations, depreciation decreases over time

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3. Units of production method

Depreciation is based on the actual usage of the asset, such as units produced.

DetailsNotes
Formula(Cost – Salvage Value) × (Units Produced ÷ Total Estimated Units)
AdvantagesMatches depreciation with actual production
DisadvantagesDifficult to estimate total units in advance

4. Sum of the years’ digits (SYD) method

An accelerated method where depreciation is higher in the early years.

DetailsNotes
Formula(Remaining Life ÷ Sum of Years Digits) × (Cost – Salvage Value)
AdvantagesRecognizes higher depreciation initially, useful for fast-depreciating assets
DisadvantagesMore complex, not widely used
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What is replacement of fixed assets and sinking fund?

Over time, assets get fully used or become obsolete. Banks and businesses plan for replacement using a sinking fund, which sets aside money regularly to replace assets in the future.

TopicDetails
Replacement of AssetSelling old asset and buying a new one. Gain or loss recorded in P&L account.
Sinking FundRegular contributions plus interest set aside to replace assets.
Accounting EntriesDr Sinking Fund A/C
Cr Cash/Bank A/C (Contributions)
Dr Investments A/C
Cr Sinking Fund A/C (Investment of Fund)

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How is depreciation applied to intangible assets?

Intangible assets like patents, goodwill, or copyrights also reduce in value over time. This reduction is called amortisation.

TopicDetails
MeaningSystematic allocation of the cost of intangible assets over their useful life.
MethodUsually straight line method is used.
Accounting EntryDr Amortisation Expense A/C
Cr Accumulated Amortisation A/C

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FAQs

1. What is depreciation?

Depreciation is the reduction in the value of a fixed asset over its useful life.

2. Why is depreciation important in accounting?

It helps match expenses with revenue and shows the true profit of a business.

3. What are the main causes of depreciation?

Physical wear and tear, obsolescence, natural factors, and legal limitations.

4. What is the written down value (WDV) method?

Depreciation is charged on the reducing book value of the asset each year.

5. What is the units of production method?

Depreciation is based on the actual usage or output of the asset.