Depreciation can be defined as a continuing and gradual decrease in the book value of fixed assets due to passage of time, constant use and obsolescence .
Under the Written Down Value method, depreciation is charged on the book value (cost –depreciation) of the asset every year commonly known as WDV of the asset .Since , the book value keeps on reducing so, the annual depreciation also keeps on decreasing .
This method is also known as ‘Diminishing Balance Method’ or ‘Reducing Instalment Method’. While applying the depreciation rate both salvage or scrap value and removal costs are ignored. It is not possible to reduce the book value to zero; but it can be reduced close to its salvage value at the end of its useful life.
FORMULA FOR WRITTEN DOWN DEPRECIATION
Depreciation Rate = 100 {1 – n√ s/c }
where , n = number of years
S = Salvage value
C = cost of asset
SUITABILITY :-
This method is most suitable to those assets that have more efficiency in the beginning and later on decreases year after year. This method is usually adopted for plant and machinery, fixtures and fittings, motor vehicles, etc. An asset gives more value to a business in initial years then later year, therefore, this method is considered as the most logical method of depreciation.
ADVANTAGES OF WRITTEN DOWN VALUE METHOD :-
- It recognizes the risk of obsolescence by charging the major part of depreciation in the early years of the life of the asset.
- Income-tax authorities recognize this method.
DISADVANTAGES OF WRITTEN DOWN VALUE METHOD :-
- This method does not take into consideration the interest on capital invested in the asset
- Under this method, the value of the asset can never be reduced to zero .
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