Depreciation, Provision and Reserves

Straight Line Method and Written Down: A Comparative Analysis

The basis of charging depreciation in accounts impacts the amount of profit earned or loss incurred during a year. Thus, it is important to choose the method of charging depreciation wisely, in order to arrive at the correct value of gain or loss. Let us understand how the straight line method of depreciation is different from the written down value method.

                                                    Learn depreciation and causes of depreciation here.

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The Straight Line Method

In this method of depreciation, we write off a fixed value every year during the useful life of the asset. The reason for this being reduction of the value of the asset to zero or the scrap value at the end of the useful life. In this method, we spread the cost of the asset equally over the lifetime of the asset. This method is also known as fixed instalment method.

A particular asset is expected to generate equal utility during its useful life. Let’s understand the formula for calculating the rate of depreciation by the straight line method:

Depreciation rate = Depreciation / cost of asset * 100

Browse more Topics under Depreciation Provision And Reserves

The Written Down Value Method

In this method, a fixed percentage of the reducing balance is written off every year as depreciation. This reduces the fixed asset to its residual value at the end of its working life. This method is also known as reducing balance or diminishing balance method where the annual charge of depreciation keeps on decreasing every year.

The depreciation charged in the initial years is higher as compared to the subsequent years. According to this method, the value of the asset is not fully extinguished. Let’s understand the formula for calculating the rate of depreciation:

Image result for wdv formula

(Source: Quora)

What are the Factors affecting the amount of  Depreciation? Learn here. 

How do SLM and WDV Method of Depreciation Compare?

Straight line method vs Written Down Value Method

BASIS FOR COMPARISON SLM WDV
Meaning In this method of depreciation, the cost of the asset is spread equally over the life years by writing off a fixed amount every year. In this method of depreciation, a fixed rate of depreciation is charged on the book value of the asset, over its useful life.
Calculation of depreciation On original cost On written down value of the asset.
Annual depreciation charge Remains fixed during the useful life. Reduces every year.
Value of asset Completely written off Not completely written off
Amount of depreciation Initially lower Initially higher
Impact of repairs and depreciation on P&L A/c Increasing trend Remains constant

What are the provisions? Learn here. 

Question for You

Ques: Compare the arithmetical difference between SLM and WDV method of charging depreciation.

Answer – Suppose the amount of fixed asset is INR 1,00,000. The rate of depreciation is 10%. Over a span of 4 years, if repair charges are 2,000, 4,000, 6,000 and 8,000 every year, the depreciation will be charged as follows:

SLM:

Year                             Depreciation               Amount debited

1                                              10000              12000

2                                              10000              14000

3                                              10000              16000

4                                              10000              18000

 

WDV:

Year                             Depreciation               Amount debited

1                                  10000                                      12000

2                                  8000                                        12000

3                                  6000                                        12000

4                                  4000                                        12000

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satish
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satish

can we take certain/uncertain income in provision

asif
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asif

Uncertain amount will be taken in provision. present obligation arising past event and second condition 50% probability and third amount will be perfect observation not randomly.

Mostakim
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Mostakim

Tk. 50000 against audit and evaluation costs has been provisioned during 30th june 2019 whike settlement was made at actual taka 47500 as on 25th July 2019? please solve this journal..

Srikar
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Srikar

On 30th June: 1. Audit expense a/c dr 50000 To Provision for Audit expense 50000 (Being Provision created for Audit expenses) 2. Profit and loss a/c dr 50000 To Audit expense a/c 50000 (Being Audit expense charged to Profit and loss a/c as an expense of current year on accrual basis) On 25th July, 2019: 1. Provision for Audit expense a/c dr 47500 To Cash/Bank 47500 (Being payment made towards Audit expense charged to the Provision created previously) 2. Provision for Audit expense a/c dr 2500(i.e,50000-47500) Profit and loss a/c 2500 (Being excess provision reversed by charging to Profit and… Read more »

Hari Prasad
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Hari Prasad

We have made provision for Bad Debts by debiting P&L during the year 2016-17. The debtors balance is still debit in our Books. How to make write off entry?

Godwin
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So interested to me

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