Under the Written Down Value Method 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.
For example, the cost of machinery purchased is Rs 2,00,000, and the rate of depreciation is 10% p.a. In this case, depreciation for the first year would be Rs 20,000 (i.e. 2,00,000 × 10%).
For the second year, depreciation will be computed on the written down value of Rs 1,80,000 (i.e. 2,00,000 − 20,000). So, the amount of depreciation for the second year would be Rs 18,000 (i.e. 1,80,000 × 10%). In a similar manner, depreciation for the subsequent years can be computed by considering the written-down value of machinery.
Advantages of Written Down Value Method
The following are the advantages of the written down value method of depreciation.
- It is based on the logical assumption that asset is used more in the earlier years, so, more cost is charged in earlier years in the form of depreciation.
- It is suitable for those assets that have high repairs and maintenance costs.
- This method is accepted by the income tax authorities.
- As more depreciation is charged in the earlier years, so the loss of the asset due to obsolescence of technology is reduced.
Disadvantages of Written Down Value Method
Given below are the disadvantages of the written down value method of depreciation.
- It is difficult and a time-consuming process to calculate the rate of depreciation under this method.
- The value of an asset under this method cannot be zero, thus, the asset cannot be completely written-off in the books.
- Under this method, there arises a shortage of funds for the replacement of an asset. This happens due to the fact that the amount of depreciation is retained and used in the business. Consequently, at the end of the useful life of an old asset, a business finds it difficult to arrange funds for its replacement.
Also, Read
Accounting Information
accounting information is often defined as data and facts produced or revealed by the financial statements of a business. This information is usually available within the sort of financial statements, financial reports, etc.
Petty Cash Book
Petty Cash Book is a book that records a large number of small payments such as conveyance, cartage, postage, telegram, and other expenses.