Short Answer

The Straight Line Method charges the same amount of depreciation every year, while the Written Down Value Method charges depreciation on the reducing balance of the asset each year.

In the Straight Line Method, depreciation remains constant, but in the Written Down Value Method, depreciation decreases over time. Both methods are used to spread the cost of assets, but they follow different approaches.

Detailed Explanation:

Difference between Straight Line and Written Down Value method

Basis of calculation

In the Straight Line Method, depreciation is calculated on the original cost of the asset. The same amount is charged every year throughout the useful life.

In the Written Down Value Method, depreciation is calculated on the book value of the asset, which reduces every year after charging depreciation.

Amount of depreciation

Under the Straight Line Method, the amount of depreciation remains fixed every year. This means the expense is equal in all years.

In the Written Down Value Method, the amount of depreciation is higher in the early years and decreases in later years. This is because it is calculated on the reduced value of the asset.

Asset value reduction

In the Straight Line Method, the value of the asset decreases evenly every year in a straight line.

In the Written Down Value Method, the value of the asset decreases rapidly in the beginning and slowly in later years.

Suitability of assets

The Straight Line Method is suitable for assets that provide equal benefit every year, such as buildings and furniture.

The Written Down Value Method is suitable for assets like machinery and vehicles that lose more value in the early years.

Effect on profit

In the Straight Line Method, profit remains more stable because the depreciation expense is the same every year.

In the Written Down Value Method, profit is lower in the early years due to higher depreciation and higher in later years as depreciation decreases.

Complexity

The Straight Line Method is simple and easy to calculate.

The Written Down Value Method is more complex because it requires calculation on the reducing balance every year.

Importance of understanding the difference

Correct method selection

Understanding the difference helps businesses choose the right method based on the type of asset.

Accurate financial reporting

Different methods affect profit and asset value differently. Choosing the correct method ensures accurate financial statements.

Better financial planning

It helps businesses plan expenses and manage assets efficiently.

Conclusion

The Straight Line Method and Written Down Value Method differ mainly in how depreciation is calculated and charged over time. While one provides equal depreciation every year, the other provides decreasing depreciation. Both methods are important and are used based on the nature of the asset and business needs.