Accountancy · Ch 7 — Depreciation, Provisions and Reserves
Limitations of Written Down Value Method
Limitations of Written Down Value Method
Why the Written Down Value Method Isn't Perfect
The Written Down Value (WDV) method is widely used because it matches depreciation with the actual decline in an asset's efficiency — higher depreciation in early years, lower in later years. But it has two serious drawbacks that you must know for exams.
Limitation 1: The Asset Can Never Be Fully Written Off
Depreciation under WDV is calculated as a fixed percentage of the reducing book value each year. Because the base keeps shrinking, the depreciation amount gets smaller and smaller but never quite reaches zero. Mathematically, the written down value approaches zero asymptotically — it gets very close but never actually becomes zero.
This means the asset's book value can never be reduced to ₹0 in the books, no matter how many years you charge depreciation. In practice, when the asset is sold or scrapped, the remaining book value is written off as a loss. But theoretically, the method leaves a perpetual residual value.
Common Mistake
Students often think that after enough years the asset value becomes zero. It does not. Even after 50 years at 10% WDV, a ₹1,00,000 asset will still show a book value of about ₹515. The value never extinguishes completely.
Limitation 2: Difficulty in Determining the Right Rate
To use the WDV method, you must decide on a suitable percentage rate of depreciation. This rate depends on:
- The estimated useful life of the asset
- The estimated scrap value (residual value) at the end of that life
Both of these are estimates. If the useful life or scrap value is guessed wrong, the depreciation rate will be incorrect. A rate that is too high will write off the asset too quickly; a rate that is too low will leave an unrealistically high book value at the end of the asset's life.
The formula to find the WDV rate is:
Rate of Depreciation = 1 - (Scrap Value / Cost of Asset)^(1/n)
where n = estimated useful life in years. This formula is not directly in the NCERT text for this section, but it is the mathematical basis for why the rate is hard to set — you need to know both the scrap value and the life accurately, which is rarely possible in practice.
Summary of Limitations
| Limitation | Explanation |
|---|---|
| Asset value never reaches zero | Depreciation is charged on reducing balance; the base never fully extinguishes |