Straight Line Method and Written Down Method: A Comparative Analysis

The two most common methods for calculating depreciation in practice are the Straight Line Method (SLM) and the Written Down Value Method (WDV). Both allocate the cost of a fixed asset over its useful life, but they do so in fundamentally different ways. The choice between them affects the amount of depreciation charged each year and the resulting book value of the asset on the balance sheet.

The core difference lies in the base on which depreciation is calculated. Under the Straight Line Method, depreciation is a fixed amount every year, calculated on the original cost of the asset. Under the Written Down Value Method, depreciation is a fixed percentage, but it is calculated on the reducing book value (cost minus accumulated depreciation) of the asset each year.

Here are the key points of difference between the two methods:

• Basis of Calculation: SLM uses the original cost of the asset as the base for calculating depreciation. WDV uses the book value (cost minus depreciation already charged) at the beginning of each year.
• Annual Depreciation Amount: Under SLM, the depreciation amount is equal every year over the asset's useful life. Under WDV, the depreciation amount is highest in the first year and decreases each subsequent year.
• Total Depreciation Charge: Under SLM, the total depreciation over the asset's life equals the depreciable cost (original cost minus scrap value). Under WDV, the total depreciation also equals the depreciable cost, but the asset's book value never reaches zero; it approaches the scrap value asymptotically.
• Recognition of Scrap Value: Under SLM, the scrap value is explicitly deducted from the original cost to determine the depreciable amount. Under WDV, the scrap value is not directly deducted; the rate of depreciation is chosen so that the book value at the end of the useful life approximates the estimated scrap value.
• Impact on Profit and Loss: Under SLM, the depreciation charge is constant, leading to a uniform impact on profit each year. Under WDV, the depreciation charge is higher in early years and lower in later years, meaning the impact on profit is greater initially and reduces over time.
• Suitability: SLM is suitable for assets where the benefit derived is uniform over time (e.g., leasehold buildings, patents). WDV is suitable for assets that lose value more rapidly in the early years or have higher repair and maintenance costs later (e.g., machinery, vehicles), as it provides a more balanced total annual charge (depreciation + repairs).