Page 139 - DCOM101_FINANCIAL_ACCOUNTING_I

Unit 11: Depreciation Accounting

11.5 Written Down Value Method Notes

This method also has the same methodology in charging depreciation on the fixed assets like

fixed percentage. Though it bears similar approach in charging depreciation, it is different in
application from the straight line method. Under this method, the depreciation is charged on the
value of the asset available at the beginning of the year.
The following formula highlights the application of this method in charging depreciation:
= 1 – (S/C) 1/n

The meaning of the above illustrated formulae is discussed through the explanation of two
different components.

The first one is (S/C) 1/n the ratio of the scrap value of the asset on the original value is appropriately
apportioned throughout the life period. It is nothing but the percentage of scrap value widened
across the life period of the asset. Once the scrap value percentage is known, the next important
step is to determine the depreciable value of the asset. The depreciable value of the asset can be
derived by deducting the percentage from 1.

Example: Life of the asset (n) = 3 years
Expected scrap value at the end of 3 years = `12,800
Original Investment = `2,00,000
Find out the percentage of depreciation to be charged.

Under this method, to charge depreciation as well as to find out the value of the asset as on a
particular date, the depreciation percentage must be given. In this problem, depreciation % is not
given, in order to determine the above illustrated formulae should be applied:

= 1 – (S/C) 1/n
= 1 – (`12,800/`2,00,000) 1/3
= 1 – 4/10 = 6/10 = 60%
The following workings will obviously facilitate the understanding of the charge of
depreciation:
The value of the Asset at the beginning of 1st Year = `2,00,000
(–) Depreciation 60% on `2,00,000 (Original value) = `1,20,000
Value of the asset at the beginning of 2nd Year = ` 80,000

(–) Depreciation 60% on ` 1,20,000.(Book Value) = ` 48,000
Value of the asset at the beginning of 3rd Year = ` 32,000
(–) Depreciation 60% on ` 32,000 (Book Value) = ` 19,200
Value of the asset at the end of the year = ` 12,800

Notes Straight Line Method vs. Written Down Value Method
Under this method of charging depreciation, unlike the straight line method, the
percentage is usually given for calculation. While calculating this method, the depreciation
is calculated on two different values.
Contd....

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