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Calculation of depreciation is an important factor for buying an asset, and accountants and economists have made two methods for calculating depreciation and the amount after depreciation. It is an important factor for the person buying an asset. We can imagine depreciation or appreciation as a fixed amount or sum of money added to or reduced from the original value in every interval. In contrast, we can also define it in terms of exponents or rates, for example, depreciation rate of a car maybe 15 percent, every year the amount equivalent to 15 percent of the value is deducted.
Straight-line Method
In this method of depreciation (or appreciation), a sum of the amount is presumed, which is added to the principal value or deducted from it in the defined interval. The principal increases uniformly with the same amount every year or decreases with the same amount. Once the appreciated or depreciation amount is fixed, it adds on or deducts a proper fixed amount. It is calculated beforehand and is calculated on the principal amount. It is assumed to be best suited to leases and intellectual property assets like copyrights.
Written down value Method
In this depreciation method, a rate is fixed on the amount; just like compound interest adds to the principal value, the written down value works on the same pattern. In the case of depreciation, the depreciation amount is calculated at every interval on the written down value. The new written down value acts as a preliminary for the next time interval when deducted.
In this case, the amount of depreciation decreases after every time interval.
For example, if an asset was valued at rupees 1 lakh at a depreciation rate of 10 per cent, after the first time interval, the amount will become rupees 90 thousand, now this 90 thousand acts the value of an asset for the next interval, and this time the 10 percent depreciation amounts to rupees 9 thousand, that makes the value 81 thousand.
It is considered more suitable for items that have a cost of repairing and maintenance like vehicles and machinery.
Difference between WDV and SLM
Conclusion
Straight-line method and written down value method are the two different patterns of depreciation devised by accountants and economists; both the methods have a lot of usage in practical life, and both are important, the way depreciation is calculated can be done by both the methods and can be selected according to asset and the need of asset holder. These two methods are important for previewing his assets and investments.
