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Difference between Written Down Value Method (WDV) and Straight Line Method (SLN)
In Written Down Value (WDV) method depreciation is charged on the reuced price. Example: Asset purchased for Rs. 100.00: Depreciation rate 10%. First year its value will be reduced to 90.00 (100-10% of 100) and in second year depreciation will be Rs. 9.00 i e 10% of 90. Similarly third year it will be Rs. 8.10. This way the value of asset never comes at Zero.
In Straight Line Method (SLN) life of a asset is known then for the duration of life, every year an equal sum is taken as depreciation. Example Asset purchased for Rs. 100.00, Life ascertained 8 years and then every year a sum of Rs. 12.50 is charged to Depreciation and after 8th year its book value will be zero.
WDV method is strongly recommended.
In Written Down Value Method, the rate of depreciation is predetermined. This is done by deducting the amount of depreciation charged before from the balance of cost of asset (Cost of Asset-Estimated Scrap Value). In simple words, in the first year the amount of depreciation charged is high and it gradually starts decreasing during the subsequent years.
The main benefit of this method is that it recognises this fact that in the initial phase of an asset, costs of maintenance, repairs etc. are less which goes on increasing with the progressing life of the asset. Thus, by charging higher amount of depreciation in the initial years and gradually decreasing the amount of depreciation counterbalance both the lower amount of repairs and maintenance cost in the initial years and the gradual increase later on. It can be noted here that the written down value can never be zero.
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