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Difference between Straight Line and Written Down Value Method of calculating Depreciation

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The word “depreciation” comes from the Latin word ‘depretium’ where ‘De’ means decline and ‘pretium’ means price. Thus the word ‘depretium’ stands for the decline in the value of assets. Depreciation refers to the decrease in the value of assets of the company over the time period due to use, wear and tear, and obsolescence. In others words, it is the method to allocate the cost of an asset over its useful life. Depreciation is always charged on the cost price of the asset and not on its market price. It is charged every year to the extent of the depreciable amount. Examples of assets that can be depreciated are Machines, Computers, Furniture, Vehicles, etc.

Methods of Charging Depreciation:

Businesses choose different methods for calculating depreciation according to their need. The two most prominent methods for calculating depreciation are:

  1. Straight Line Method
  2. Written Down Value Method

1. Straight Line Method:

Under this method of charging depreciation, the amount charged as depreciation for any asset is fixed and equal for every year. The amount of depreciation is deducted from the original cost of an asset and charged on the debit side of the Profit and Loss A/c as a loss. The concerned asset is depreciated with an equal amount every year until the book value of the asset becomes equal to the scrap value of the asset. It is also called the ‘Equal Installment Method’ or ‘Fixed Installment Method’.

Formula for Calculating Depreciation:

1. When Scrap Value is given:

Depreciation=\frac{Cost~Price~of~Asset-Scrap~Value}{Estimated~Life~of~Assets}

2. When Rate of Depreciation is given:

Depreciation=\frac{Cost~Price~of~Asset\times{Rate~of~Depreciation}}{100}

2. Written Down Value Method:

Under this method of charging depreciation, the amount charged as depreciation for any asset is charged at a fixed rate, but on the reducing value of the asset every year. The amount of depreciation is deducted from the written down value (i.e., cost less depreciation) of an asset and charged on the debit side of the Profit and Loss A/c as a loss. The concerned asset is depreciated with an unequal amount every year, as the depreciation is charged to the book value and not to the cost of the asset. It is also called the ‘Diminishing Balance Method’.

Formula for Calculating Depreciation:

1. When Scrap Value is given (To find the rate of depreciation):

Rate~of~Depreciation=\frac{Cost~Price~of~Asset-Scrap~Value}{Estimated~Life~of~Assets}

2. When Rate of Depreciation is given:

Depreciation=\frac{Written~Down~Value~of~the~Asset\times{Rate~of~Depreciation}}{100}

Difference Between Straight Line and Written Down Value Method:

Basis

Straight Line Method

Written Down Value Method

Meaning

Under this method of charging depreciation, the amount charged as depreciation for any asset is fixed and equal for every year.Under this method of charging depreciation, the amount charged as depreciation for any asset is charged at a fixed rate, but on the reducing value of the asset every year.

Depreciation Charged

Depreciation is calculated on the original cost of the asset.Depreciation is calculated on the written-down value of the asset.

Amount of Depreciation

The amount of depreciation charged is same for every year.The amount of depreciation charged is different for every year. It is higher in the initial year and gradually decreases.

Value of Asset

The value of an asset under this method is completely written off.The value of an asset under this method is not completely written off.

Burden

Under this method, the cost of maintenance increases year by year adding to the increased burden on the company as depreciation is also fixed for every year.Under this method, the cost of maintenance increases year by year, but depreciation decreases in later years. Because of this, the burden on the company is more or less the same throughout the year.

Tax Purpose

This method is not recognised by the Income Tax Department, and therefore, it is not applicable for Income Tax purposes. This method is recognised by the Income Tax Department, and therefore, it is applicable for Income Tax purposes. 

Last Updated : 03 Aug, 2023
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