The written-down value method is used to calculate the depreciation of an asset. The written-down value method increases the process of tracking the depreciation expenses and helps companies and owners to account for the correct amount of depreciation in the early years. The WDV method is also known as the ‘reducing balance method’. This method consists of applying a predetermined percentage of the amount of the asset on the balance sheet at the beginning of the accounting period. It also involves applying the amount of depreciation reduced in the following years.
When a new asset is incorporated into the company, its value is reduced once it is ready to use. This reduction in the value of a fixed asset is called depreciation. In more definite terms, depreciation is the decline in the value of a fixed asset due to obsolescence and usage.
If a company acquires a fixed asset, such as a machine, the asset will still lose some of its value over time, even if it is not used, because it becomes outdated. Fixed assets decline in value. In technical terms, this decline is called depreciation. Calculations can determine depreciation. Generally, there are two methods, the straight-line method and the written-down value method. There are many different methods of determining depreciation in a company’s fixed asset. Still, the most widely-used methods are the straight-line method or SLM and the written-down value method or WDV. Both methods use different approaches to determining depreciation.
Written-down Value Method or WDV
The written down method determines previously purchased assets’ current worth. Let us understand how this method works by looking at an example of depreciation’s written down value method.
Example: Company ABC acquires a machine that costs them ₹1,00,000. The machine has an expected life of three years. Suppose the depreciation rate for the machine is 10%. We can find the machine’s depreciation by the written-down value method formula.
The cost of the machine: ₹ 1,00,000
Depreciation at the end of the first year:
100000 10100= 10000
The written down value of the asset at the end of the first year:
WDV at the end of the second year:
The written down value at the end of the second year:
Depreciation at the end of the third year:
81000 10100= 8100
The written down value at the end of the third year:
Therefore, the written down value of the asset at the end of the three years of usage will be ₹72,900.
The written-down value method has the following advantages.
- The written down value method accurately determines the depreciation value of an asset. This greatly helps the company determine the asset’s selling price.
- Under the formula of the written-down value method, it applies a higher depreciation value in the early years of the asset’s lifespan; this provides an opportunity for companies to do a proper valuation for the assets that may become outdated quickly.
The written-down value method has the following disadvantages.
- The assets that may have uniform use for most of their lifespan do not get the correct evaluation from the written-down value method because of the higher depreciation value in the early years.
- The method results in higher depreciation costs and reduces the business’s net income.
SLM, or the straight-line depreciation method, is the earliest and most widely-used method of determining depreciation. This method follows the assumption that an asset is equally used during its life period. If we plot a graph between the amount of depreciation and the period, the graph will result in a straight line because its constant over the period, and that is why it is called the straight-line method.
Straight-line Method and Written-down Value Method: Difference
In the SLM depreciation method, the asset’s cost is spread uniformly over the asset’s lifespan by writing off a fixed amount every year. In the written-down value method, however, a fixed depreciation rate is charged on the asset’s original value over its lifespan.
The most widely used methods of determining depreciation are the straight-line method or SLM and the written-down value method or WDV. Both methods use different approaches to determining depreciation. The written-down value method consists of applying a predetermined percentage of the amount of the asset on the balance sheet at the beginning of every accounting period. The amount of depreciation will be reduced in the following years.