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Recognition by Income Tax Act


Straight line method is not recognised by Income Tax Act while written down value method is recognised by the Income Tax Act.

 

Suitability
Straight line method is suitable for assets in which repair charges are less, the possibility of obsolescence is less and scrap value depends upon the time period involved. Such as freehold land and buildings, patents, trade marks, etc. Written down value method is suitable for assets, which are affected by technological changes and require more repair expenses with passage of time such as plant and machinery, vehicles, etc.

 

Basis of Difference

 

Straight Line Method

 

Written Down Value Method

 

1. Basis of charging depreciation

 

 

2. Annual depreciation charge

3. Total charge against

profit and loss account in respect of depreciation

and repairs

4. Recognition by income tax law

5. Suitablity

 

Original cost

 

 

Fixed (Constant) year

Unequal year after year. It increases in later years.

 

 

Not recognised

It is suitable for assets in which repair charges are less, the possibility of

and obsolescence is low

Scrap value depends upon expenses the time period involved time.

Book Value (i.e. original

ciation cost less depreciation

charged till date)

Declines year after year

Almost equal every year.

 

 

 

Recognised

It is suitable for assets,

which are affected by

technological changes

and obsolescence is low and require more repair expenses with passage of time.

Fig. 7.3: Comparison of straight line and written down value method





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