Written Down Value Method

Written Down Value Method

Under this method, depreciation is charged on the book value of the asset at the beginning of each accounting period. Because the book value keeps reducing each year by the amount of depreciation charged, this method is also called the reducing balance method.

The core idea is simple: you apply a fixed percentage to the asset's opening book value to calculate the year's depreciation. Since the book value falls every year, the depreciation amount also falls year after year. This is why it is sometimes called the reducing installment or diminishing value method.

Why depreciation falls each year

The method assumes that the benefit a business gets from an asset keeps diminishing as the asset grows older. An asset is most efficient in its early years, so a larger depreciation charge in those years matches the higher benefit received. In later years, as the asset becomes less efficient, a smaller depreciation charge is appropriate.

Example calculation

Suppose an asset costs ₹2,00,000 and depreciation is charged at 10% p.a. on the written down value.

As you can see, the depreciation amount goes on reducing: ₹20,000 in year I, ₹18,000 in year II, ₹16,200 in year III, and so on.

Formula for the rate of depreciation

When you know the cost, scrap value, and useful life of an asset, you can compute the rate of depreciation using this formula:

Where:

• r = Rate of depreciation (in percentage)
• n = Expected useful life (in years)
• s = Scrap value (net salvage value)
• c = Cost of the asset

Worked example for rate calculation

A truck costs ₹9,00,000 and its net salvage value after 16 years of useful life is ₹50,000. The rate of depreciation is computed as:

r = [1 - 16√(50,000/9,00,000)] × 100

r = [1 - 16√(0.0556)] × 100

r = (1 - 0.834) × 100

r = 0.166 × 100

r = 16.6%

So depreciation would be charged at 16.6% p.a. on the written down value of the truck.

Accounting treatment

The journal entry for recording depreciation under the written down value method is exactly the same as under the straight line method:

At the end of the accounting period, the Depreciation Account is closed by transferring it to the Profit & Loss Account: