Depreciation Methods, GST Journal Entries & Accounting Concepts

Posted on Jan 26, 2026 in Accounting and Finance

Depreciation Methods: Straight-Line and Diminishing Balance

Choosing the appropriate depreciation method is crucial for accurate financial reporting. The two most common methods are the Straight-Line Method (SLM) and the Diminishing Balance Method (DBM) (also known as Written Down Value or Declining Balance). Each has distinct merits and demerits, making them suitable for different types of assets and business objectives.

Straight-Line Method (SLM)

📈 The Straight-Line Method allocates an equal amount of depreciation expense over each year of an asset’s useful life.

Merits (Advantages)

• Simplicity and ease of calculation: It’s the easiest method to understand and apply, reducing administrative burden and errors.
• Uniform expense recognition: Provides a consistent, predictable expense each year, which simplifies budgeting and financial planning.
• Complete write-off: Allows the asset’s book value to be fully written down to its estimated salvage (scrap) value at the end of its useful life.
• Suitable for certain assets: Ideal for assets whose obsolescence is primarily due to the passage of time or whose usefulness is consistent over time (e.g., furniture, buildings).

Demerits (Disadvantages)

• Unrealistic valuation: It may not accurately reflect the asset’s actual decline in value, as many assets lose more value in their early years.
• Uneven burden on profits: In later years, the total annual charge (Depreciation Expense + Maintenance/Repairs) tends to be higher because maintenance costs increase as the asset ages, while the depreciation charge remains constant.
• Ignores usage: Does not consider the actual usage or wear and tear of the asset, which may fluctuate from year to year.

Diminishing Balance Method (DBM)

📉 The Diminishing Balance Method applies a fixed rate of depreciation to the asset’s reducing book value each year. This is an accelerated method, resulting in higher depreciation in the early years and lower amounts later.

Merits (Advantages)

• Realistic matching principle: Better aligns with the accounting matching principle for many assets. Assets are typically more productive and require less maintenance in their early years, so a higher depreciation charge in these years better reflects their economic contribution.
• Tax benefits: By front-loading depreciation expenses, a company can report a lower taxable income in the initial years, potentially providing short-term tax savings.
• Balanced charge on profits: The total annual charge (Depreciation Expense + Maintenance/Repairs) tends to be relatively constant over the asset’s life. High early depreciation offsets lower initial repair costs, and lower later depreciation offsets higher repair costs.
• Suitable for certain assets: Ideal for assets that become obsolete quickly or lose most of their utility/value early (e.g., computers, high-tech machinery, vehicles).

Demerits (Disadvantages)

• Complexity: The annual depreciation amount changes, and the calculation is slightly more complex than SLM. Determining the appropriate rate can be challenging.
• Incomplete write-off: Since the depreciation is a percentage of the remaining balance, the asset’s book value never mathematically reaches zero (though a company can manually write off the remaining value in the final year to reach salvage value).
• Lower net income in early years: The higher depreciation charge in the initial years results in lower reported net income, which could affect financial ratios and investor perception.

Feature Comparison

GST Journal Entries and Accounting Treatment

The basic journal entries for Goods and Services Tax (GST) in accounting involve recording the tax paid on purchases (Input GST) and the tax collected on sales (Output GST), and then settling the net liability.

GST is generally split into different components depending on the transaction location:

• Intra-State (Within the same state): CGST (Central GST) + SGST (State GST).
• Inter-State (Between different states): IGST (Integrated GST).

Purchase Entries (Input GST)

🛒 When a business purchases goods or services, the GST paid to the supplier is treated as an asset because it is an Input Tax Credit (ITC) that can be claimed later to offset the output tax liability.

1. Intra-State Purchase (CGST + SGST)

Note: The Purchase/Expense A/c is debited only with the net value (excluding GST). Input GST accounts are debited because they represent an asset (ITC) increasing.

2. Inter-State Purchase (IGST)

Sales Entries (Output GST)

🛍️ When a business sells goods or services, the GST collected from the customer is treated as a liability because it must be remitted to the government.

1. Intra-State Sale (CGST + SGST)

Note: The Output GST accounts are credited because they represent a liability increasing. The Debtor/Bank/Cash A/c is debited with the total invoice value (net value + GST).

2. Inter-State Sale (IGST)

GST Adjustment / Settlement Entry

🧾 At the end of the tax period (usually monthly), the Input GST (asset) is adjusted against the Output GST (liability) to determine the net tax payable to the government.

The Output GST accounts (liabilities) are debited to reduce/clear their balance, and the Input GST accounts (assets) are credited to reduce/clear the credit claimed.

1. Set-off (Input Tax Credit)

Assuming the set-off happens in the following order: IGST first, then CGST, then SGST.

2. Payment of Net Liability

If, after the set-off, there is a balance remaining in the Output GST accounts (i.e., Output > Input), that remaining amount is the net GST payable and must be remitted to the government.

Accounting Concepts and Conventions

Accounting concepts and conventions form the foundational rules and assumptions guiding the preparation of financial statements, ensuring consistency, reliability, and comparability across businesses. Concepts are basic assumptions derived from logic and evidence, while conventions are practical guidelines based on tradition and judgment.[1][2][3][5]

Key Accounting Concepts

These core ideas underpin how transactions are recorded.

• Business Entity Concept: Treats the business as separate from its owners, recording only business transactions.[3][1]
• Money Measurement Concept: Records only quantifiable monetary transactions, ignoring non-financial aspects like employee morale.[5][1]
• Going Concern Concept: Assumes the business will continue indefinitely, justifying asset capitalization over liquidation values.[1][3]
• Accounting Period Concept: Divides business life into fixed periods (e.g., yearly) for periodic reporting.[9][1]
• Cost Concept: Assets are recorded at historical purchase cost, not current market value.[9][1]
• Dual Aspect Concept: Every transaction affects two accounts equally (debit and credit), maintaining Assets = Liabilities + Equity.[5][1]
• Accrual Concept: Recognizes revenues and expenses when earned or incurred, not when cash moves.[3][1]
• Matching Concept: Pairs expenses with related revenues in the same period for accurate profit calculation.[1]
• Realization Concept: Revenue is recognized only when earned and realizable, typically upon sale.[3][1]

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Key Accounting Conventions

These provide flexible guidelines for application.

• Consistency Convention: Use the same accounting methods across periods for comparability.[2][4]
• Full Disclosure Convention: Reveal all relevant financial information in statements or notes.[4]
• Materiality Convention: Focus on significant items that influence decisions, ignoring trivial ones.[2][4]
• Conservatism (Prudence) Convention: Anticipate losses but not gains, choosing conservative estimates when uncertain.[6][4]