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Written Down Value Method


Under this method, depreciation is charged on the book value of the asset. As the book value keeps on reducing by the annual charge of depreciation, it is also known as reducing balance method. This method involves the application of a pre-determined percentage of the book value of the asset at the beginning of every accounting period, so as to calculate the amount of depreciation. The amount of depreciation reduces year after year.

 

For example, the original cost of the asset is Rs. 2, 00,000 and depreciation is charged @ 10% p.a. at written down value, then the amount of depreciation will be computed as follows:
  1. Depreciation I year) = Rs.20, 00,000 x 10
                                                             ___ = Rs.20, 000
                                                             100
  1. Written down value
    (at the end of the I year) = Rs. 2,00,000 - 20,000 = Rs. 1,80,000
  2. Depreciation (II year) =Rs. 1,80,000 x 10
                                                           ____ =Rs.18, 000
                                                            100
  3. Written down value
    (at the end of the II year) = Rs. 1,80,000 - Rs. 18,000 = Rs. 1,62,000
  4. Depreciation (III year) =Rs.1, 62,000 x 10
                                                            ____ = Rs. 16,200

                                                             100
  5. Written down value
    (at the end of the III year) = Rs.1, 62,000-Rs.16, 200 =Rs.1, 45,800
It is clear from the example; the amount of depreciation goes on reducing year after year. For this reason, it is also known reducing installment or diminishing value method. This method is based upon the assumption that the benefit accruing to business from assets keeps on diminishing as the asset becomes old (refer figure 7.2).

This is due to the reason that a predetermined percentage is applied to a gradually shrinking balance on the asset account every year. Thus, large amount is recovered as depreciation charge in the earlier years than in later years.


 

Under written down value method, the rate of depreciation is computed by using the following formula:

 

Where, r = Rate of depreciation
n = Expected useful life
s = Scrap value
c = Cost of an asset

For example, the original cost of a truck is Rs. 9, 00,000 and its net salvage value after 16 years of useful life is Rs. 50,000 then the appropriate rate of depreciation will be computed as under:





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