Methods of Depreciation - Written Down Value Method

The Written Down Value (WDV) Method is a way to calculate depreciation where a fixed percentage is charged every year on the asset’s current book value (its remaining value after previous depreciation), making the depreciation amount decrease each year as the asset’s value reduces.

Because the depreciation amount decreases every year in the Written Down Value (WDV) Method, the graph of depreciation forms a downward sloping curve, showing less depreciation with each passing year(as shown in the below image)

This method is also known as:

• Diminishing Balance Method

• Reducing Balance Method

\[\text{Depreciation}=\text{Book Value at beginning of year}\times\frac{\text{Rate of Depreciation}}{100}\]

Where:

• Book Value = Cost – Accumulated Depreciation

• Rate of Depreciation (%) = Fixed rate used each year

Advantages

1. Reflects realistic asset use — higher depreciation in early years.

2. Equalizes total annual charge (Depreciation + Repairs).

3. Accepted by income tax authorities.

4. Reduces risk of overvaluation of older assets.

Disadvantages

1. Complicated calculation compared to SLM.

2. Asset value never becomes fully zero.

3. May not create sufficient funds for replacement without reserve planning.

A company purchased machinery on 1st April 2020 for ₹1,00,000. The rate of depreciation is 10% per annum under the Written Down Value Method. Find:

1. The depreciation amount each year, and

2. The book value at the end of each year, for 4 years.

Detailed Calculations

Step 1: In the first year, depreciation is charged on the cost of the asset.

• Depreciation = 10% of 1,00,000 = ₹10,000
• Book value at end of Year 1 = 1,00,000 − 10,000 = ₹90,000

Step 2: In the second year, depreciation is charged on the opening book value (₹90,000).

• Depreciation = 10% of 90,000 = ₹9,000
• Book value at end of Year 2 = 90,000 − 9,000 = ₹81,000

Step 3: In the third year, depreciation = 10% of 81,000 = ₹8,100

• Book value = 81,000 − 8,100 = ₹72,900

Step 4: In the fourth year, depreciation = 10% of 72,900 = ₹7,290

• Book value = 72,900 − 7,290 = ₹65,610

• The WDV method calculates depreciation by applying a fixed percentage to the book value of an asset at the beginning of each year.

• The method is also called the Diminishing Balance Method or Reducing Balance Method.

• WDV results in higher depreciation charges in the early years and lower charges in later years.

• The graph for depreciation using WDV forms a downward-sloping curve, showing less depreciation with each passing year.

• WDV is recognized by tax authorities like the Indian Income Tax Department.

• This method matches the natural wear and tear of assets such as machinery, vehicles, and tools—assets that lose value faster in their initial years.

• WDV is more complex than the Straight-Line Method, and it never reduces asset value to zero.

• Under SLM, asset value can fall to zero, and profit remains steady, whereas under WDV, depreciation and profits both decrease over time.