After going through this lesson you will be able to understand the difference between the Straight Line Method and the Written Down value method
The straight Line Method is one of the most popular and easy methods of charging depreciation on fixed assets. Under this method, depreciation is charged on the original cost of the asset every year, at a fixed rate of percentage. Therefore, in this case, the amount of depreciation remains the same for each of the years. This method of depreciation is also known as the Original Cost Method or Equal /Fixed Instalment Method.
Written Down Value Method is another method of charging depreciation on fixed assets. Under this method, depreciation is not charged on the original cost of the asset. It is charged at a fixed rate on the diminished or reduced value of the asset, i.e. the cost after deducting previously charged depreciation. As a result of this, with the decline in the value of assets year after year, the amount of depreciation also decreases from one year to another. This method of charging depreciation is also known as Diminishing Balance Method or Reducing Instalment Method.
Difference between Straight Line Method and Written Down value method
| Point of Distinction | Straight Line Method | Written Down Value Method |
|---|---|---|
| Basis of Calculation | Calculated on the original cost of the asset. | Calculated on the written-down value of the asset. |
| Amount of Depreciation | Remains the same throughout the effective life of the asset. | Reduces each year throughout the effective life of the asset. |
| Book Value of Asset | Book value becomes zero at the end of the effective life of the asset. | The book value of the asset can never become zero. |
| Suitability | Suitable for the assets which have a lesser possibility of obsolescence and have lesser repair charges such as, Patents, Copyrights, Land, and Buildings, etc. | It is suitable for assets that need more repairs and maintenance costs and has a higher possibility of obsolescence in the later years such as, Plant and Machinery, Car, etc. |
| Rate of Depreciation | Simple to calculate. | Difficult to calculate. |
| Effect of Depreciation and Repairs | The combined cost on account of repairs and depreciation is lower in the initial years and higher in later years. In other words, it has an Unequal effect on Profit and Loss Account over the life of the asset, as depreciation remains the same for each year but repair cost increases in the later years. | The combined cost of two is more or less equal throughout the period. It means it has an Equal effect on the Profit and Loss Account over the life of the asset, like depreciation, is high and repairs are less in the initial years but in the later years the repair cost increases and depreciation cost decreases. |
| Recognition under Income Tax Act | It is not recognized under the Income Tax Act. | It is recognized under the Income Tax Act. |
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