Short Answer
The Written Down Value Method is a method of depreciation where depreciation is charged on the remaining value of the asset each year. This means the amount of depreciation decreases over time.
In this method, higher depreciation is charged in the early years and lower in later years. It is suitable for assets like machinery and vehicles that lose more value in the beginning.
Detailed Explanation:
Written Down Value Method
Meaning of written down value method
The Written Down Value Method (WDV), also known as the reducing balance method, is a method of calculating depreciation in which depreciation is charged on the book value of the asset every year.
The book value means the cost of the asset minus accumulated depreciation. As depreciation is deducted each year, the value of the asset reduces, and the next year’s depreciation is calculated on this reduced value.
Working of the method
In this method, a fixed percentage of depreciation is applied every year to the remaining value of the asset. Since the value decreases each year, the amount of depreciation also becomes smaller over time.
For example, if an asset costs ₹1,00,000 and depreciation is charged at 10%, the first year’s depreciation will be ₹10,000. The remaining value becomes ₹90,000. In the second year, depreciation is calculated on ₹90,000, which will be ₹9,000, and so on.
This process continues until the asset reaches its residual value or is no longer useful.
Higher depreciation in early years
One important feature of this method is that it charges higher depreciation in the early years of the asset’s life. This is because the asset is more efficient and productive in the beginning.
As time passes, the efficiency reduces, and so does the depreciation amount. This matches the actual usage and benefit of the asset.
Suitable for certain assets
The Written Down Value Method is suitable for assets like machinery, vehicles, and equipment that lose value quickly in the initial years.
These assets require more maintenance later, so lower depreciation in later years balances the overall cost.
Impact on financial statements
Under this method, the profit and loss account shows higher depreciation expense in the early years and lower expense in later years. This results in lower profit in the beginning and higher profit in later years.
In the balance sheet, the asset value reduces quickly at first and then slowly over time.
Advantages of written down value method
Realistic approach
This method reflects the actual pattern of asset usage and value reduction.
Suitable for assets with rapid loss
It is ideal for assets that lose value quickly in the beginning.
Better matching of cost and revenue
Higher depreciation in early years matches higher productivity of the asset.
Limitations of written down value method
Complex calculation
This method is more complex than the straight-line method.
Unequal expense
Depreciation expense is not the same every year, which may affect profit comparison.
Conclusion
The Written Down Value Method is a depreciation method where a fixed percentage is applied to the reducing value of an asset each year. It results in higher depreciation in early years and lower in later years. This method is useful for assets that lose value quickly and helps in realistic financial reporting.