Written Down Value (WDV) Method of Depreciation

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What is Written Down Value Method of Depreciation?

The Written Down Value (WDV) method of depreciation is also known as Reducing Installment or Reducing Balance Method or Diminishing Balance Method. In this method, the depreciation is calculated at a constant fixed percentage each year on the diminishing book value, commonly known as WDV of the asset (book value less depreciation).

The use of the balance brought forward from the previous year or book value and the fixed rate of depreciation decreases the depreciation charges over the lifespan of the asset. That is, when the entire lifespan of an asset is considered, the value of the asset decreases gradually but does not become zero at the end of the lifespan of the asset.

While calculating the depreciation in the WDV method, both the salvage value (or scrap value) and the removal costs are ignored. That means, when we calculate the depreciation in the WDV method, the scrap that is the remains of the tangible assets such as building, machinery, and furniture, and the cost to remove them to get new assets are to be ignored.

Formula to Calculate Depreciation through the WDV Method

The WDV method is considered one of the most logical methods of calculating depreciation. In the WDV method, an asset is considered to provide higher value in the initial years than the later years. The formula that is used to calculate depreciation is,

$$\mathrm{Rate\:of\:Depreciation\:(R) =1-[\frac{s}{c}]^{1/n}}$$

Where,

  • 's' stands for the scrap value at the end of the period, that is ‘n’.

  • 'c' stands for the written-down value at present.

  • ‘n’ is the useful life of the asset.

Note − The life of an asset for different asset classes is noted in the Schedule II of Companies Act. For example, the useful life of buildings (other than factory buildings) with an RCC frame structure is 60 years and that of buildings (other than factory buildings) with other than RCC frame structure is 30 years.

Merits of Using the WDV Method

Following are the merits of using the WDV method to calculate depreciation −

  • WDV method equalizes the net total charges of using the asset (amount of depreciation plus the repair charges) every year. It is more equitable than the straight-line method.

  • It offers more weight to depreciation in the initial years. This is true for tangible assets.

  • It considers the risk of obsolescence by taking the major part of depreciation in the early years of the life of the asset.

Demerits of Using the WDV Method

Following are the demerits of using the WDV method −

  • In later years, the main cost of the asset is completely lost of sight.

  • The asset value can never be reduced to zero.

  • The interest on capital invested in the asset is ignored.

raja
Updated on 24-Dec-2021 10:33:05

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