Accountancy · Ch 7 — Depreciation, Provisions and Reserves
Annual Charge of Depreciation
Annual Charge of Depreciation
Annual Charge of Depreciation
The annual amount of depreciation charged to the profit and loss account each year is not the same under the two main methods of depreciation. This difference arises directly from the basis on which each method calculates depreciation.
Under the Straight Line Method
The annual depreciation charge remains fixed and constant every year. This is because depreciation is calculated on the original cost of the asset. Since the original cost does not change from year to year, the amount of depreciation also does not change.
For example, if a machine costs ₹1,00,000 and has a useful life of 10 years with no scrap value, the annual depreciation under SLM is ₹10,000 every single year — year 1, year 5, and year 10 all show the same charge.
Under the Written Down Value Method
The annual depreciation charge is highest in the first year and declines progressively in subsequent years. This happens because depreciation is calculated on the written down value (the book value at the start of each year), not on the original cost.
The written down value itself decreases each year as depreciation is subtracted. Applying a fixed percentage to a declining balance naturally produces a declining annual charge.
In WDV, the first year's depreciation is the largest because the written down value is highest at the beginning (equal to the original cost). As the asset's book value falls, the same percentage yields a smaller absolute amount each year.
The Core Distinction
| Method | Basis of Calculation | Pattern of Annual Charge |
|---|---|---|
| Straight Line Method | Original cost (constant) | Fixed and constant every year |