Written Down Value Method
Businesses choose different methods for calculating depreciation according to their need. One of the most prominent methods for calculating depreciation is the Written Down Value Method. Under this method of charging depreciation, the amount charged as depreciation for any asset is charged at a fixed rate, but on the reducing value of the asset every year. The amount of depreciation is deducted from the written down value (i.e., cost less depreciation) of an asset and charged on the debit side of the Profit and Loss A/c as a loss. The concerned asset is depreciated with an unequal amount every year, as the depreciation is charged to the book value and not to the cost of the asset.
Merits of Written Down Value Method:
1. Based on Logical Assumption: In the Written Down Value Method, the depreciation is charged more in earlier years of use of an asset, unlike the Straight Line Method in which depreciation is charged equally for every year. This is based on a logical assumption that assets will be used more in the initial years.
2. Suitability: This method is suitable for those assets that require high maintenance and repair cost and the later stage of their life.
3. Equal Charge Against Income: In the initial years of an asset, the depreciation charged under this method will be higher and repair charges due to wear and tear of the asset will be low. After some years, when the asset becomes older, the amount of depreciation charged will be less, but the amount spent on repair becomes high. Because of this, the burden on the business related to depreciation and repairs combined remains almost the same every year.
4. Recognised by Authorities: This method of charging depreciation is recognised by various government authorities, including Income Tax Department.
The formula for calculating Depreciation:
1. When the Scrap Value is Given (To find the rate of depreciation) b:
2. When Rate of Depreciation is Given:
1. At the time of Purchase of Fixed Assets:
2. At the End of Each Accounting Period:
(i) For the Depreciation charged on Fixed Assets:
(ii) For Transferring Amount of Depreciation to Profit & Loss A/c:
3. At the Time of Sale of Fixed Assets:
(i) For the Depreciation charged on Selling Assets (Up to the Date of Sale):
(ii) For the Sale of Fixed Assets:
(iii) For the Profit/Loss on Sale of Fixed Assets:
- For the Profit on Sale of Fixed Assets (If Sale Price is More than the Book Value):
- For the Loss on Sale of Fixed Assets (If Sale Price is Less than the Book Value):
A machine was purchased on 1st April 2019 for ₹39,400, and ₹600 was spent on its installation. On 1st October in the same year, additional machinery costing ₹20,000 was acquired. On 1st October 2021, the machinery purchased on 1st April 2019 was sold for ₹22,000 and on the same date, new machinery was purchased for ₹10,000. Depreciation is provided annually on 31st March @ 10% per annum on the written down value of the asset. Pass the Journal Entries and prepare Machinery Account from 2019-2021.
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