Accountancy · Ch 7 — Depreciation, Provisions and Reserves
Suitability
Suitability
Suitability of Depreciation Methods
The choice between the Straight Line Method (SLM) and the Written Down Value Method (WDV) is not arbitrary — it depends on the nature of the asset, the pattern of its benefits, and the behaviour of repair costs over time.
Straight Line Method — When to Use It
SLM is suitable for assets where:
- Repair charges are low throughout the asset's life
- The possibility of obsolescence (the asset becoming outdated) is low
- The scrap value depends primarily on the time period involved, not on usage
Examples of such assets include freehold land and buildings, patents, and trademarks. These assets do not deteriorate rapidly with use, and their useful life can be estimated with reasonable certainty based on time alone.
Written Down Value Method — When to Use It
WDV is suitable for assets where:
- Technological changes are likely to affect the asset's value
- Repair expenses increase significantly as the asset ages
Examples include plant and machinery, vehicles, and other equipment that undergo wear and tear with usage and require more frequent repairs in later years. The WDV method naturally charges higher depreciation in early years when the asset is more productive, and lower depreciation later when repair costs rise — this keeps the total charge (depreciation + repairs) roughly equal year after year.
Comparison of the Two Methods
The textbook provides a clear comparison on five key points:
| Basis of Difference | Straight Line Method | Written Down Value Method |
|---|---|---|
| Basis of charging depreciation | Original cost | Book Value (original cost less depreciation charged till date) |
| Annual depreciation charge | Fixed (constant) year after year | Declines year after year |
| Total charge against profit and loss account (depreciation + repairs) | Unequal year after year — lower in early years, higher in later years | Almost equal every year — higher depreciation in early years offsets lower repairs, and vice versa |
| Recognition by income tax law | Not recognised | Recognised |