Written Down Value Method And Know How Depreciation and Amortisation is Done

Written Down Value Method

Written Down Value of an asset is formulated after keeping an account of its amortization and depreciation. To put it simply, it presents the current worth of an asset that is owned by an organization from an accounting point of view, and this value is mentioned in the balance sheets of the company’s financial statements. You can also find people referring to written down value as net book value or book value.

Key Features of Written Down Value Method

  • It is the value of an asset after calculating its amortization and depreciation.
  • Amortization is calculated for intangible assets whereas depreciation is calculated for physical assets.
  • The current value of an asset that has been brought previously is represented through its written-down value.
  • The written-down value is formulated by subtracting the amortization or depreciation from the original value of an asset.
  • For keeping a check on the value of an asset, written down value is utilized to get to its final pricing at the time of selling.

How Does the Written Down Value Method Formula Work?

The WDV method formula is quite simple to comprehend. You need to get the original purchase cost of the asset and the prices of any upgrades or improvements done to it. From this sum, subtract the impairments or depreciation applied to the asset. You will get the desired written-down value.

WDV Method of Amortization

In comparison to the written down value method of depreciation, amortization methods are easier and are used for determining the written down value of an intangible asset or debt. As per the schedule, an asset’s written-down value is entered in the books of an organization, and multiple methods are used for amortizing different types of assets. For instance, patents are booked annually, and bonds use the method of effective interest rate of amortization.

Also, for the outstanding loans, amortization schedules are made to follow the repayment schedules but with the interest and principal differentiation. 

Ballooning and Diminishing Balance are the other two types of amortization methods. A company needs to get the book value of the amortized assets because it assists in keeping a check on them. The asset gets removed from the books or renewed if it is amortized to zero.

WDV Method of Depreciation

WDV depreciation can be calculated using a method called the diminishing balance method and this technique of accounting lowers the asset value by a certain percentage every year. In accounting, multiple other written-down value depreciation techniques are utilized for capitalizing the costs of various assets. One such example of a technique is the straight-line depreciation which subtracts the same value every year based on dividing the subtraction of the asset’s value and its thought of salvage value by the number of years it is expected to be utilized.

For a company, it is important to get them written down the value of every asset that has been depreciated because this gets added to the company’s overall assets. In the books, depreciated assets begin with their purchase price and are sold before the depreciated value reaches zero. To determine the selling cost of an asset, it is crucial to know the depreciated value of an asset. At the time of sale, the book value of an asset determines the least value at which the asset can be sold.

Written Down Value Method Example

To get a year’s depreciation, you need to multiply the rate in percent with the WDV which was at the start of the year. For instance, the depreciation of year 1 is 20,00,000*12.95% which is equal to 2,59,000. To get the depreciation for the subsequent year, you need to subtract the already charged depreciation from the previous WDV.

Difference Between Straight Line Method and Written Down Value Method

Straight Line Method

  • In this method of calculating depreciation, a fixed amount is charged as depreciation on the assets.
  • The rate of depreciation varies because the depreciation being charged remains constant.
  • The asset value becomes completely zero.
  • This one is completely written-off.
  • Depreciation charged is low at the start.
  • This method is easy for calculating depreciation.

Written Down Value Method

  • In this method, there is a fixed interest rate that is put on the asset for calculating the depreciation.
  • The rate of depreciation remains constant till the time the asset is useful.
  • The asset value will not become zero.
  • This one is not completely written-off.
  • Depreciation charged is comparatively higher.
  • This method is slightly complicated for calculating depreciation.

Advantages of Written Down Value

1. The Charge Remains Equal Against the Income

In the starting year, the repair charges are less but the depreciation is high. But when an asset becomes old, the repair charges become high, and depreciation starts getting low. Thus, the overall burden on the profit regarding the repairs and depreciation remain similar through the consecutive years.

2. The Method is Logical

For the initial year, when the asset is quite useful, the depreciation charged is high and in the subsequent years when the asset starts losing its value, the depreciation charged is low.

Disadvantages of Written Down Value

1. You Cannot Completely Write Off an Asset

In the WDV method, even if the asset becomes completely useless, it cannot be lowered to zero. Some amount will always be present in the account of the asset.

2. The Interesting Factor is Not Considered

This method does not consider the loss of interest which is on the principal invested in the asset. The fact that an amount would have gained interest if it was invested externally, is not taken into consideration.

3. Difficult to get the Depreciation Rate

In the WDV method, you cannot determine the depreciation rate easily and it is usually kept high because it takes a long time to get an asset written down to its scrap value.

4. The Main Use of an Asset is Ignored

This method has a fixed deprecation rate on the value of an asset which is written down by the application of prefixed depreciation rate on the original cost of the asset. But the main use of an asset is ignored while formulating the depreciation.

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What does a write-down mean?

Write down means reducing an asset’s book value to a fair market value.

When is the WDV method best suited to calculate depreciation?

It is useful for the assets which tend to lose their value quickly.

What is the written-down value in tax?

It is the expense that remains after the claim of the capital allowances for a period of charging.

What is a writing down allowance for cars?

It is the deduction of a percentage of the cost of an item from the annual profits.

Is writing down allowance the same as depreciation?

No, it is not the same concept.

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