What is the Written Down Value Method?
Written Down Value method is a depreciation technique that applies a constant rate of depreciation to the net book value of assets each year, thereby recognizing more depreciation expenses in the early years of the life of the asset and less depreciation in the later years of the life of the asset. In short, this method accelerates the recognition of depreciation expenses systematically and helps businesses recognize more depreciation in the early years. It is also known as Diminishing Balance Method or Declining Balance Method.
The formula is as follows:
How to Calculate WDV Depreciation?
Let’s understand the same with the help of an example.
Whitefield Company purchased a Machinery costing $12000 with a useful life of 7 years and a residual value of $2000. The rate of DepreciationRate Of DepreciationThe depreciation rate is the percent rate at which an asset depreciates during its estimated useful life. It can also be defined as the percentage of a company's long-term investment in an asset that the firm claims as a tax-deductible expense throughout the asset's useful life. is 20%.
Calculation of written down value (WDV) of depreciation can be done as follows –
Depreciation = ($12,000 – $2,000) * 20%
Depreciation = $2000
Calculation of end of the year can be done as follows –
Value at End of Year = ($12,000 – $2,000) – $2,000
Value at the End of Year = $8,000
Depreciation as per the Written down Value Method is calculated as follows:
Similarly, we can do the calculation, as shown above, for years 2 to 5.
Whitefield depreciated the Machinery using WDV Method, and as we can observe, the depreciation expense amount is higher during the initial years and kept reducing as the asset gets older.
Written Down Value Method vs. Straight Line Method of Depreciation
One of the most common and popular types of WDV Method is the Double Declining Balance MethodDouble Declining Balance MethodThe Double Declining Balance Method is one of the accelerated methods used for calculating the depreciation amount to be charged in the company's income statement. It is determined by multiplying the book value of the asset by the straight-line method's rate of depreciation and 2. This method applies depreciation two times the Straight-Line Rate. The word “Double” signifies this aspect. The method is suitable for assets that quickly lose their value and, as such, requires higher depreciation.
Let’s understand the differences between WDV and Straight-line depreciationStraight-line DepreciationStraight Line Depreciation Method is one of the most popular methods of depreciation where the asset uniformly depreciates over its useful life and the cost of the asset is evenly spread over its useful and functional life. with the help of an example.
Mason Limited purchased a Machinery costing $25000 for a specific project and expected useful life of 5 years. The Machine is expected to have a residual value of $5000 at the end of its useful life.
Calculation of written down value of depreciation can be done as follows –
Based on the above facts, the Straight-Line Rate is as follows:
- Straight Line Rate = (Cost of Machine-Residual Value) / Useful life (in years)
- Straight Line Rate = ($25000-$5000) / 5 = $4000
The Straight Line Depreciation Rate can be done as follows –
- Straight Line Depreciation Rate= $4000 / ($25000-$5000) = 20%
- Double Declining Balance Rate= 2 * 20% = 40%
So, the calculation of depreciation can be done as follows –
- Depreciation = 40% * ($25,000 – $10,000) = $6,000
- Accumulated DepreciationAccumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset's purchase price and its carrying value on the balance sheet. = $10,000 + $6,000
- Accumulated Depreciation = $16,000
Depreciation Schedule as per Double Declining Balance is shown below:
Similarly, we can do the calculation, as shown above, for years 3 and 4.
- Written down Value Method helps in determining the depreciated value of the asset, which helps determine the price at which the asset should be sold.
- It applies a higher amount of depreciation in the initial years of the useful life of the asset. It is an ideal method to record depreciation of assets, which lose their value quickly. An example of such assets could be any Technological development software by an IT company. By recognizing accelerated depreciationAccelerated DepreciationAccelerated depreciation is a way of depreciating assets at a faster rate than the straight-line method, resulting in higher depreciation expenses in the early years of the asset's useful life than in the later years. The assumption that assets are more productive in the early years than in later years is the main motivation for using this method. in the early years, the business can determine its fair market value on the Balance Sheet before the technology becomes outdated.
- Higher Depreciation during initial years results in reduced taxes, or we say deferral of taxesDeferral Of TaxesDeferred tax liabilities arise to the company due to the timing difference between the accrual of the tax and the date when the company pays the taxes to the tax authorities. This is because taxes get due in one accounting period but are not paid in that period. to later years for the business on account of lower Net Income but increased Cash profits as Depreciation is a Non-cash expenseNon-cash ExpenseNon-cash expenses are those expenses recorded in the firm's income statement for the period under consideration; such costs are not paid or dealt with in cash by the firm. It involves expenses such as depreciation..
- Written Down Value Method recognizes higher depreciation during the early years and may not be an ideal method of depreciation for those assets which have uniform utility throughout their useful life and doesn’t suffer from the risk of obsolescence and technology change.
- Higher Depreciation expenses due to this method result in reduced Net Income for the business.
How WDV Depreciation Offsets Repair Requirements?
The method is based on the premise that certain assets not just have limited use and need to be depreciated with higher values during their useful life so as to show the true fair value of the asset on the balance sheet; but also this depreciation method is apt for those assets which require higher repairs in the later stages of the asset life. By applying higher depreciation during the initial years when repairs requirement is less and lesser depreciation during later years when repair requirement is more, a balancing act is also achieved under this method.
Let us take an example to illustrate this concept.
Mayor Inc purchased machinery costing $80000 in 2014 with a useful life of 4 years with no residual valueResidual ValueResidual value is the estimated scrap value of an asset at the end of its lease or useful life, also known as the salvage value. It represents the amount of value the owner will obtain or expect to get eventually when the asset is disposed. at the end of the useful life. The company has incurred the following expenditure in the form of Repairs of the machinery during the last 5 years:
Now let’s understand the point discussed above using the two different Depreciation methods, i.e., WDV and Straight Line Depreciation Method. We will understand how using WDV and applying higher depreciation during the initial years when repairs require is less and lesser depreciation during later years when a repair requirement is more a balancing act.
Calculation of written down value of depreciation can be done as follows –
The Depreciation Amount calculation–
The Depreciation Amount = Cost of Asset-Residual Value/Useful life ( in years)
- Depreciation Amount = $80000 / 4 = $20000
- Depreciation Rate = $20000 / $80000 = 25%
So, the calculation of depreciation is as follows –
- Depreciation = $80000 * 25% = $20,000
The Total Maintenance Charges will be –
- Total Maintenance Charges = $20,000 + $2,000
- Total Maintenance Charges = $22,000
Similarly, we can do the calculation, as shown above, for the year 2016 to 2018.
Thus we can observe how the Written Down Value method ensures that higher depreciation expenses in initial years and lower depreciation expenses in later years help in offsetting higher Repairs and Maintenance charges as the asset becomes older and need more such expenses.
Written Down Value Method Video
Written down Value method is an appropriate method for matching the expenses to revenues as most of the long-lived assets generate more benefits in the early years of their economic life and fewer benefits in the later years of their life. It ensures the same by more Depreciation expenses in the early years and fewer depreciation expenses in the later years of the asset’s useful life.
This article has been a guide to Written Down Value Method. Here we discuss how to calculate WDV Depreciation along with practical examples and explanation. Here we also discuss its advantages & disadvantages. You may learn more about accounting from the following articles –