Methods of Depreciation in Accounting: SLM vs WDV Explained with Examples
Previous Chapter Link : https://www.financewithaishira.com/2026/07/what-is-depreciation.html
Methods of Depreciation: Meaning, Types & Examples
After closing the account books for the year, Riya felt much more confident than she had a few months ago. She now understood why businesses record depreciation, why it is treated as an expense, and how it appears in the financial statements. The next morning, while checking the café's accounts, she paused at the depreciation entry once again.
Riya: Sharma Ji, last year we recorded ₹20,000 as depreciation on our coffee machine. But how did we decide that amount? Why not ₹15,000 or ₹25,000?
Sharma Ji: That's an excellent question. Knowing that an asset loses value is only half the story. The next step is deciding how much value it loses every year. And that's where different methods of depreciation come in.
Riya: Different methods? I thought every business calculated depreciation in the same way.
Sharma Ji: Not at all. Different assets lose their value differently. A building may provide almost the same benefit every year, while a delivery vehicle may lose a larger portion of its value in its early years. Since assets are used differently, accountants also use different methods to calculate depreciation."
Riya : Then let's learn those methods.
Sharma Ji: That's exactly what we're going to do today.
Why Do We Need Different Methods of Depreciation?
In the previous chapter, we learned that depreciation spreads the cost of an asset over its useful life. However, one important question still remains:
Should every asset lose the same amount of value every year?
The answer is No.
Think about these two business assets:
A wooden office table
A delivery scooter
Both are long-term assets, but they are not used in the same way. The office table may remain in good condition for many years with very little change in its usefulness. On the other hand, the scooter travels hundreds of kilometres every month. Its engine, tyres, and other parts wear out much faster, especially during the initial years of use. If both assets are depreciated using exactly the same pattern, the financial statements may not reflect their actual usage. This is why accountants developed different methods of depreciation. Each method follows the same objective—allocating the cost of an asset over its useful life—but the way the cost is allocated differs.
What Are Methods of Depreciation?
A method of depreciation is the approach used to determine how much depreciation expense should be charged during each accounting period.
In simple words, it is the rule or technique that tells us how the cost of an asset will be distributed throughout its useful life.
Although every method ultimately depreciates the asset over time, they do not produce the same yearly depreciation amount. Some methods allocate an equal amount every year, while others allocate a higher amount in the beginning and a lower amount in later years. The choice depends on how the asset is expected to generate economic benefits for the business.
An Everyday Example
Sharma Ji: Suppose you buy two pairs of shoes.
One pair is used only during business meetings.
The other pair is worn every day while managing the café.
Riya: The second pair will wear out much faster.
Sharma Ji: "Exactly. Even though both shoes were purchased on the same day, they don't lose value at the same speed."
Business assets behave in a similar way. Some provide almost equal benefits every year, while others provide greater benefits during their early years and gradually become less efficient. Therefore, using only one depreciation method for every asset wouldn't always represent reality.
What Makes Businesses Choose One Method Over Another?
Choosing a depreciation method isn't random. Businesses consider several factors before deciding which method best reflects an asset's usage. Some of these factors include:
Nature of the Asset
Different assets are used differently.
For example:
Office furniture is usually used consistently over many years.
Machines may become less efficient after continuous use.
Vehicles often experience higher maintenance costs as they grow older.
The depreciation method should match this pattern of usage.
Pattern of Economic Benefit
Every asset helps generate revenue for the business, but not always at the same rate. Some assets provide nearly equal benefits throughout their useful life. Others are highly productive during their early years and gradually become less useful. A depreciation method should reflect this expected pattern.
Company Policy
Many businesses adopt a depreciation method and continue using it consistently from year to year. Using the same method regularly improves comparability between financial statements of different accounting periods.
Accounting Standards
Businesses cannot simply choose any method they like. Accounting standards require that the selected method should reflect how the asset's future economic benefits are expected to be consumed. If that pattern changes significantly, the depreciation method may also need to be reviewed.
Are There Many Depreciation Methods?
Yes. Over the years, accountants have developed several methods to calculate depreciation . Some of the commonly known methods are:
Straight Line Method (SLM)
Written Down Value Method (WDV)
Units of Production Method
Machine Hour Method
Sum of Years' Digits Method
Double Declining Balance Method
Annuity Method
However, not all of these methods are equally common in basic accounting. For beginners and most commerce students, two methods are especially important because they are widely taught in academic courses and frequently used in practice.
These are:
Straight Line Method (SLM)
Written Down Value Method (WDV)
These two methods form the foundation for understanding depreciation calculations. Once you understand them well, learning the remaining methods becomes much easier.
A Quick Comparison Before We Begin
Before studying each method in detail, Sharma Ji drew a simple chart on the café's whiteboard.
| Method | Annual Depreciation |
|---|---|
| Straight Line Method (SLM) | Same every year |
| Written Down Value (WDV) | Higher initially, lower later |
Riya : So in one method the expense remains constant, and in the other it keeps changing?
Sharma Ji : Exactly, That single difference changes how an asset's value appears in the accounts over its entire life.
What Will We Learn Next?
Now that Riya understood why different depreciation methods exist, she was ready to learn the first and simplest method.
Sharma Ji picked up a marker and wrote two words on the whiteboard:
Straight Line Method
Sharma Ji : We'll begin with this one because almost every student learns it first. It's simple, logical, and one of the most widely used methods of depreciation.
Riya : I'm ready. Let's calculate depreciation for the café's coffee machine.
Sharma Ji : Perfect, That's exactly what we'll do in the next part.
Recap
By the end of this lesson, Riya discovered that although every depreciable asset loses value over time, they don't all lose value in the same pattern. Some assets provide almost equal benefits every year, while others lose their usefulness more rapidly during the initial years. Because of these differences, accountants use different methods of depreciation instead of applying a single approach to every asset.
She also learned that a depreciation method is simply a technique used to determine how an asset's cost should be allocated over its useful life. Among the various methods available, the Straight Line Method (SLM) and the Written Down Value (WDV) method are the two most important for beginners and form the basis of most accounting courses.
In the next part, we'll explore the Straight Line Method (SLM) in detail, understand its formula, solve step-by-step numerical examples, and see how Riya applies it to calculate depreciation for her café's coffee machine.
Methods of Depreciation: Straight Line Method (SLM)
The following afternoon, Sharma Ji placed a calculator on the café counter.
Sharma Ji: Yesterday, we learned why businesses use different depreciation methods. Today, we'll finally calculate depreciation.
Riya: I hope it isn't too complicated.
Sharma Ji: Not at all. We'll start with the easiest and most widely used method—the Straight Line Method.
What Is the Straight Line Method (SLM)?
The Straight Line Method (SLM) is a depreciation method in which an equal amount of depreciation is charged every year throughout the asset's useful life.
In other words, the business assumes that the asset provides equal benefits every year, so the same portion of its cost is recognised as depreciation each year. Unlike some other methods where depreciation changes from year to year, the Straight Line Method keeps the annual depreciation constant.
Simple Definition
Straight Line Method (SLM) is a method of depreciation in which an equal amount of depreciation is charged every accounting year over the useful life of an asset.
Why Is It Called the "Straight Line" Method?
Riya: Why is it called the Straight Line Method?
Sharma Ji : If the depreciation expense remains the same every year, the graph forms a straight line.
For example:
| Year | Depreciation |
|---|---|
| 1 | ₹18,000 |
| 2 | ₹18,000 |
| 3 | ₹18,000 |
| 4 | ₹18,000 |
| 5 | ₹18,000 |
Since the depreciation amount doesn't increase or decrease, the pattern remains uniform, giving the method its name.
When Is the Straight Line Method Suitable?
The Straight Line Method works best for assets that provide nearly equal economic benefits throughout their useful life.
Examples include:
Office furniture
Buildings (excluding land)
Office cabins
Library shelves
Storage racks
Air conditioners installed in offices
These assets usually don't lose their usefulness dramatically during the initial years. Instead, they are used fairly consistently over time. For such assets, charging the same depreciation every year presents a reasonable picture of their consumption.
Understanding SLM with Riya's Café
Sharma Ji pointed toward the café's wooden dining tables.
Sharma Ji: Look at these tables. They've been in the café for almost two years.
Riya: Yes. We clean them every day, and they're still in good condition.
Sharma Ji : Exactly, Do you think the tables lost half their value in the very first year?
Riya : No, Their condition has changed only slightly. That's why furniture is often depreciated using the Straight Line Method. Its usefulness remains fairly stable over the years, so recording the same depreciation every year makes sense.
Formula for Straight Line Method
Once the concept was clear, Sharma Ji wrote the formula on the whiteboard.
Annual Depreciation = Cost of Asset - Residual Value / Useful Life
Let's understand each part.
Cost of Asset
This is the total cost incurred to acquire the asset and make it ready for use.
It may include:
Purchase price
Transportation charges
Installation expenses
Any other directly attributable costs
Residual Value
Residual value (also called scrap value) is the estimated amount the business expects to receive when the asset reaches the end of its useful life. Since this amount is expected to be recovered later, it is not depreciated.
Useful Life
Useful life is the estimated period during which the business expects the asset to generate economic benefits.
It may be measured in:
Years
Months
Production units (for certain assets)
For the Straight Line Method, useful life is commonly expressed in years.
Numerical Example
Sharma Ji decided it was time for a practical calculation. The café purchased a commercial coffee machine with the following details:
| Particulars | Amount |
|---|---|
| Cost of Machine | ₹2,00,000 |
| Residual Value | ₹20,000 |
| Useful Life | 10 years |
Step 1: Find the depreciable amount.
Depreciable Amount = Cost − Residual Value
= ₹2,00,000 − ₹20,000 = ₹1,80,000
Step 2: Divide by the useful life.
Annual Depreciation = ₹1,80,000 ÷ 10 = ₹18,000 per year
Sharma Ji : That's all there is to it.
Riya : That was much easier than I expected.
Year-wise Depreciation Schedule
To help Riya understand how the asset's value changes over time, Sharma Ji prepared a schedule.
| Year | Opening Book Value | Depreciation | Closing Book Value |
|---|---|---|---|
| 1 | ₹2,00,000 | ₹18,000 | ₹1,82,000 |
| 2 | ₹1,82,000 | ₹18,000 | ₹1,64,000 |
| 3 | ₹1,64,000 | ₹18,000 | ₹1,46,000 |
| 4 | ₹1,46,000 | ₹18,000 | ₹1,28,000 |
| 5 | ₹1,28,000 | ₹18,000 | ₹1,10,000 |
| 6 | ₹1,10,000 | ₹18,000 | ₹92,000 |
| 7 | ₹92,000 | ₹18,000 | ₹74,000 |
| 8 | ₹74,000 | ₹18,000 | ₹56,000 |
| 9 | ₹56,000 | ₹18,000 | ₹38,000 |
| 10 | ₹38,000 | ₹18,000 | ₹20,000 |
Riya : The depreciation remains ₹18,000 every year, but the book value keeps reducing.
Sharma Ji : Exactly, The annual depreciation is fixed, while the carrying amount of the asset gradually decreases until it reaches its residual value.
Rate of Depreciation Under SLM
Sometimes, businesses express depreciation as a percentage instead of an amount.
The formula is: Rate of Depreciation = Annual Description / Cost of Assets * 100
Using the café's example:
Annual Depreciation = ₹18,000
Cost = ₹2,00,000
Rate = (18,000 ÷ 2,00,000) × 100 = 9% per annum
This means the machine is depreciated at 9% every year under the Straight Line Method.
Advantages of the Straight Line Method
After completing the calculations, Riya asked another question.
Sharma Ji : Why do so many businesses use this method?
1. Very Simple to Calculate
The formula is straightforward, making it easy for students, accountants, and businesses to apply.
2. Equal Expense Every Year
Since the depreciation amount remains constant, annual expenses remain more stable. This makes financial statements easier to compare.
3. Suitable for Many Assets
Assets like furniture, buildings, office equipment, and fixtures usually provide benefits evenly over time. The Straight Line Method reflects this pattern reasonably well.
4. Easy to Understand
There are no changing percentages or complex calculations. Even beginners can quickly prepare depreciation schedules using this method.
Limitations of the Straight Line Method
Although the method is widely used, it is not suitable for every situation.
1. Doesn't Reflect Actual Usage
Some assets lose their efficiency much faster during the early years. The Straight Line Method ignores this difference.
2. Ignores Increasing Repair Costs
As an asset becomes older, maintenance expenses often increase. However, depreciation remains the same every year. This may not accurately represent the total cost of using the asset.
3. Not Ideal for Rapidly Changing Technology
Assets such as computers, mobile devices, and certain machinery may become obsolete quickly. Charging equal depreciation every year may not reflect their actual decline in value.
Common Beginner Mistakes
Before ending the lesson, Sharma Ji highlighted a few mistakes that students often make.
Mistake 1: Ignoring Residual Value
Many beginners divide the entire cost by the useful life. Instead, residual value should first be deducted unless the question states otherwise.
Mistake 2: Confusing Cost with Book Value
Under the Straight Line Method, depreciation is calculated using the original depreciable cost, not the reduced book value.
Mistake 3: Expecting Depreciation to Change Every Year
In SLM, the depreciation amount remains constant throughout the asset's useful life. Only the book value changes each year.
Recap
By the end of the lesson, Riya understood why the Straight Line Method is considered the simplest method of depreciation. She learned that it allocates an equal amount of depreciation every year, making it suitable for assets that provide consistent benefits throughout their useful life.
Using the café's coffee machine, she calculated the annual depreciation step by step, prepared a depreciation schedule, and saw how the book value gradually decreased while the yearly depreciation remained unchanged. She also discovered the method's advantages, its limitations, and the common mistakes students should avoid.
Sharma Ji : What if an asset loses more value in its early years and less value later? Should we still charge the same depreciation every year?
Riya : Probably not.
Sharma Ji : Exactly, That's why our next lesson is on the Written Down Value (WDV) Method, where depreciation is calculated differently to reflect that changing pattern.
Methods of Depreciation: Written Down Value (WDV) Method
Riya: The Straight Line Method is quite simple. We charge the same depreciation every year, and the calculations are easy.
Sharma Ji : That's true. But let me ask you something. He pointed towards the café's delivery scooter parked outside. Do you think this scooter loses the same amount of value in its first year as it does in its eighth year?"
Riya : Probably not. During the first few years it's used every day, travels long distances, and starts losing its value quickly. Later, there isn't much value left to lose.
Sharma Ji : Exactly. Many assets lose a larger portion of their value in the beginning and a smaller portion in later years. For such assets, accountants often use the Written Down Value Method.
What Is the Written Down Value (WDV) Method?
The Written Down Value (WDV) Method, also known as the Diminishing Balance Method or Reducing Balance Method, is a method of depreciation in which a fixed percentage of depreciation is charged on the asset's book value at the beginning of each year.
Since the book value reduces every year after deducting depreciation, the depreciation amount also becomes smaller each year. Unlike the Straight Line Method, the annual depreciation is not constant.
Simple Definition
Written Down Value (WDV) Method is a method of depreciation in which a fixed percentage is applied to the asset's written down (book) value every year, resulting in decreasing depreciation over time.
Why Is It Called the Written Down Value Method?
Riya : What exactly is Written Down Value?
Sharma Ji : Every year, after depreciation is deducted, the remaining value of the asset shown in the books is called its Written Down Value or Book Value. Since depreciation is always calculated on this reduced value instead of the original cost, the method is known as the Written Down Value Method.
How Is WDV Different from SLM?
Sharma Ji drew a quick comparison.
Straight Line Method
Depreciation is calculated on the original cost every year.
Annual depreciation remains equal.
Written Down Value Method
Depreciation is calculated on the remaining book value every year.
Annual depreciation decreases every year.
Riya : So in WDV, the base for calculation changes every year.
Sharma Ji : Exactly.
Formula for WDV Method
Sharma Ji wrote the formula on the whiteboard.
Annual Depreciation = Opening Book Value * Depreciation Rate
Closing Book Value = Opening Book Value - Depreciation
The same percentage is applied every year, but since the opening book value keeps reducing, the depreciation amount also reduces.
Understanding WDV with Riya's Café
Suppose the café purchased a delivery scooter for ₹2,00,000.
Depreciation Rate = 20% per year
Sharma Ji : How much depreciation should we charge during the first year? Since the scooter is new, the opening book value is ₹2,00,000.
Year 1
Depreciation = ₹2,00,000 × 20% = ₹40,000
Closing Book Value = ₹2,00,000 − ₹40,000 = ₹1,60,000
Year 2
The opening book value is now ₹1,60,000.
Depreciation = ₹1,60,000 × 20% = ₹32,000
Closing Book Value = ₹1,60,000 − ₹32,000 = ₹1,28,000
Riya : Even though the depreciation rate is still 20%, the amount has become smaller.
Sharma Ji : Exactly, The rate remains constant, but the value on which the rate is applied keeps decreasing.
Complete Depreciation Schedule
| Year | Opening Book Value | Depreciation (20%) | Closing Book Value |
|---|---|---|---|
| 1 | ₹2,00,000 | ₹40,000 | ₹1,60,000 |
| 2 | ₹1,60,000 | ₹32,000 | ₹1,28,000 |
| 3 | ₹1,28,000 | ₹25,600 | ₹1,02,400 |
| 4 | ₹1,02,400 | ₹20,480 | ₹81,920 |
| 5 | ₹81,920 | ₹16,384 | ₹65,536 |
Riya : Now I can clearly see the pattern. The depreciation keeps decreasing every year.
Why Does WDV Charge Higher Depreciation Initially?
Sharma Ji : Think about technology. A new computer performs very efficiently during its first few years.
After some time:
It becomes slower.
Software requirements increase.
Newer models become available.
Businesses often replace it before it completely stops working.
Because many assets lose a significant portion of their value during their early years, charging higher depreciation initially gives a more realistic picture of their consumption. This is one of the biggest reasons businesses prefer the WDV Method for certain assets.
Where Is the WDV Method Commonly Used?
The Written Down Value Method is generally suitable for assets that lose value rapidly during their initial years.
Examples include:
Motor vehicles
Computers and laptops
Mobile devices
Machinery
Manufacturing equipment
Electronic appliances
These assets often become less valuable quickly because of regular use or technological advancements.
Advantages of the WDV Method
Riya : Why would a business choose WDV instead of the simpler Straight Line Method?
Sharma Ji explained :
1. Reflects Actual Decline in Value
Many assets lose more value during the initial years. The WDV Method captures this pattern better than SLM.
2. Suitable for Technological Assets
Electronic devices often become outdated quickly. Charging higher depreciation in the early years reflects this reality.
3. Better Matching of Costs
As an asset becomes older, depreciation decreases while repair and maintenance costs usually increase. This creates a more balanced total expense over the asset's life.
4. Widely Used in Practice
Many businesses and tax regulations prefer or permit the Written Down Value Method for specific categories of assets.
Limitations of the WDV Method
Although useful, the method also has some disadvantages.
1. More Complex Calculations
Unlike SLM, the depreciation has to be calculated every year on the revised book value.
2. Unequal Annual Expenses
Since depreciation changes every year, comparing yearly expenses becomes slightly more difficult.
3. Asset Never Becomes Exactly Zero
Because depreciation is always calculated on the remaining balance, a small amount of book value may continue to remain unless specific adjustments are made at the end of the asset's useful life.
Common Beginner Mistakes
Before ending the lesson, Sharma Ji highlighted a few mistakes that students frequently make.
Mistake 1: Applying the Rate to the Original Cost Every Year
This is the most common error. Under the WDV Method, the depreciation rate is always applied to the opening book value, not the original purchase cost.
Mistake 2: Changing the Depreciation Rate Every Year
Only the depreciation amount changes. The percentage remains the same unless the business officially revises it.
Mistake 3: Confusing Book Value with Market Value
The written down value is an accounting value shown in the books. It does not necessarily represent the price the asset can be sold for in the market.
SLM vs WDV – A Quick Illustration
Sharma Ji drew one final comparison. Suppose an asset costs ₹2,00,000. Under the Straight Line Method, annual depreciation may remain ₹18,000 every year. Under the Written Down Value Method at 20%, depreciation would look like this:
| Year | SLM | WDV |
|---|---|---|
| 1 | ₹18,000 | ₹40,000 |
| 2 | ₹18,000 | ₹32,000 |
| 3 | ₹18,000 | ₹25,600 |
| 4 | ₹18,000 | ₹20,480 |
Riya : SLM gives equal depreciation every year, whereas WDV starts with a higher amount and gradually reduces it.
Sharma Ji : Exactly, Choosing the right method depends on how the asset is expected to provide benefits to the business.
Recap
By the end of the lesson, Riya understood that the Written Down Value (WDV) Method calculates depreciation differently from the Straight Line Method. Instead of charging the same amount every year, it applies a fixed depreciation rate to the asset's opening book value, causing the depreciation amount to decrease year after year.
Through the café's delivery scooter example, she learned how to calculate depreciation step by step, prepare a depreciation schedule, and understand why assets such as vehicles, machinery, and computers are often depreciated using this method. She also explored its advantages, limitations, and the common mistakes students should avoid while solving WDV problems.
Sharma Ji : Now you know the two most important depreciation methods used in accounting.
Riya : The only thing left is to compare them side by side and understand when each method should be used.
Sharma Ji : Exactly. That's what we'll cover in the next and final part of this chapter.
Methods of Depreciation: Comparing SLM & WDV + Other Methods
A few days later, Riya was updating the café's fixed asset register. She looked at two depreciation schedules lying on the table. One belonged to the coffee machine, calculated using the Straight Line Method. The other belonged to the delivery scooter, calculated using the Written Down Value Method.
Riya: Sharma Ji, both methods seem correct. So how does a business decide which one to use?
Sharma Ji : That's the final lesson. There isn't a universally 'best' method. The best method is the one that reflects how the asset actually provides benefits to the business.
Straight Line Method vs Written Down Value Method
Although both methods aim to allocate the cost of an asset over its useful life, they differ in how depreciation is calculated and recognised each year. The following comparison makes the differences easier to understand.
| Basis of Comparison | Straight Line Method (SLM) | Written Down Value Method (WDV) |
|---|---|---|
| Meaning | Equal depreciation every year | Depreciation decreases every year |
| Calculation Base | Original cost (less residual value, if considered) | Opening book value of the asset |
| Annual Depreciation | Remains constant | Reduces every year |
| Depreciation Rate | Amount usually remains fixed | Percentage remains fixed |
| Book Value | Decreases uniformly | Decreases rapidly in the beginning |
| Calculation | Simple | Slightly more complex |
| Suitable For | Furniture, buildings, office fixtures | Vehicles, machinery, computers, electronics |
| Maintenance Cost | Not considered | Better matches increasing maintenance costs |
| Financial Impact | Stable yearly expenses | Higher expense in early years |
Understanding the Difference Through an Example
Sharma Ji drew two columns on the whiteboard. Suppose a business purchases an asset for ₹2,00,000.
Under the Straight Line Method
Annual depreciation remains ₹18,000 every year.
| Year | Depreciation |
|---|---|
| 1 | ₹18,000 |
| 2 | ₹18,000 |
| 3 | ₹18,000 |
| 4 | ₹18,000 |
The depreciation amount never changes.
Under the Written Down Value Method (20%)
| Year | Depreciation |
|---|---|
| 1 | ₹40,000 |
| 2 | ₹32,000 |
| 3 | ₹25,600 |
| 4 | ₹20,480 |
The depreciation becomes smaller every year because it is calculated on the reduced book value.
Which Method Is Better?
Riya : So which method should businesses always use?
Sharma Ji : That's the wrong question. The right question is: Which method reflects the asset's actual usage?
If an asset provides almost equal benefits every year, the Straight Line Method may be more appropriate. If an asset loses value quickly during its early years, the Written Down Value Method often gives a more realistic picture. The choice depends on the nature and expected use of the asset rather than on which method produces lower or higher depreciation.
Factors Affecting the Choice of Depreciation Method
Businesses consider several factors before selecting a depreciation method.
1. Nature of the Asset
Different assets lose value differently.
For example:
Buildings usually remain useful for many years.
Computers become outdated much faster.
Vehicles experience heavy wear and tear from regular use.
The depreciation method should match these characteristics.
2. Pattern of Economic Benefits
If an asset generates similar benefits every year, equal depreciation may be appropriate. However, if most of the benefits are received during the early years, a method with higher initial depreciation may better reflect its usage.
3. Industry Practices
Certain industries commonly use particular depreciation methods for specific assets. Following accepted industry practices helps maintain consistency and comparability.
4. Accounting Standards
Accounting standards require businesses to select a method that best reflects how the economic benefits of the asset are consumed. If circumstances change significantly, the depreciation method may also need to be reviewed.
5. Consistency
Once a suitable depreciation method is selected, businesses generally continue using it consistently for similar assets. Frequent unnecessary changes can make financial statements difficult to compare across different accounting periods.
Other Methods of Depreciation
Although the Straight Line Method and Written Down Value Method are the most commonly studied methods, accountants also use several other depreciation methods in specific situations.
Let's briefly understand them.
1. Units of Production Method
Under this method, depreciation depends on how much the asset is used, rather than on how much time has passed. An asset that produces more units during a year will have higher depreciation for that year. This method is commonly used for manufacturing equipment where output can be measured accurately.
2. Machine Hour Method
Instead of calculating depreciation based on years, this method calculates depreciation according to the number of hours the machine operates. The more hours a machine works, the greater the depreciation charged. It is suitable for factories where machines are operated for varying durations.
3. Sum of Years' Digits Method
This is an accelerated depreciation method. Higher depreciation is charged during the initial years, while lower depreciation is recognised in the later years. Although less common in basic accounting, it is useful when an asset provides greater benefits at the beginning of its life.
4. Double Declining Balance Method
This method is another form of accelerated depreciation. It applies a depreciation rate that is generally twice the Straight Line rate, resulting in significantly higher depreciation during the early years. It is commonly used for assets that become obsolete quickly due to technological advancements.
5. Annuity Method
The Annuity Method considers not only depreciation but also the interest that could have been earned on the amount invested in the asset. Because of its complexity, it is mainly used in specialised accounting situations and is rarely encountered in introductory accounting courses.
Common Mistakes While Choosing a Depreciation Method
Before ending the discussion, Sharma Ji shared a few mistakes that beginners often make.
Mistake 1: Assuming Every Asset Uses the Same Method
Different assets may require different depreciation methods depending on their nature and usage.
Mistake 2: Choosing a Method Only to Reduce Profit or Tax
The depreciation method should reflect the actual consumption of the asset's economic benefits, not simply produce a preferred financial result.
Mistake 3: Thinking One Method Is Always Better
Neither SLM nor WDV is universally superior. Each method is appropriate in different circumstances.
Chapter Summary
As they closed the accounts for the day, Riya looked back at everything she had learned.
She now understood that depreciation is more than just a yearly adjustment. Different assets lose value in different ways, and accountants choose a depreciation method that best reflects how an asset is used.
She learned that the Straight Line Method charges the same depreciation every year, making it suitable for assets that provide consistent benefits. In contrast, the Written Down Value Method applies a fixed percentage to the asset's book value, resulting in higher depreciation during the early years and lower depreciation in later years.
She also became familiar with other depreciation methods such as the Units of Production Method, Machine Hour Method, Sum of Years' Digits Method, Double Declining Balance Method, and Annuity Method, understanding that each serves specific business needs.
Sharma Ji : You've now completed one of the most important topics in accounting.
Riya : Earlier, depreciation seemed like just another journal entry. Now I understand how different methods help businesses present a fair and realistic view of their assets and profits.
Sharma Ji: Exactly. And that's what accounting is all about—representing business transactions as accurately as possible.
With that, they locked the café for the evening, ready to begin the next chapter of Riya's accounting journey.
Key Takeaways
Depreciation methods determine how the cost of an asset is allocated over its useful life.
Different assets lose value differently, so businesses use different depreciation methods.
The Straight Line Method (SLM) charges an equal amount of depreciation every year.
The Written Down Value (WDV) method charges a fixed percentage on the asset's book value, resulting in decreasing depreciation over time.
SLM is suitable for assets that provide consistent benefits, such as furniture and buildings.
WDV is commonly used for assets like machinery, vehicles, and computers that lose value more rapidly in the early years.
Under SLM, annual depreciation remains constant, while under WDV it decreases every year.
Choosing the appropriate depreciation method helps present accurate financial statements and fairly measure business profits.
Frequently Asked Questions (FAQs)
1. What are the methods of depreciation?
Methods of depreciation are different techniques used to allocate the cost of a depreciable asset over its useful life. The most common methods are the Straight Line Method (SLM) and the Written Down Value (WDV) Method.
2. Why are different methods of depreciation used?
Different assets lose value in different ways. Some provide equal benefits every year, while others lose value faster during the initial years. Different methods help match depreciation with the asset's actual usage.
3. What is the Straight Line Method (SLM)?
The Straight Line Method is a depreciation method in which an equal amount of depreciation is charged every year throughout the asset's useful life.
4. What is the formula for the Straight Line Method?
Annual Depreciation = (Cost of Asset − Residual Value) ÷ Useful Life
5. What is the Written Down Value (WDV) Method?
The Written Down Value Method calculates depreciation by applying a fixed percentage to the asset's opening book value each year. As the book value decreases, the depreciation amount also decreases.
6. Why does depreciation decrease under the WDV Method?
Because depreciation is calculated on the reduced book value each year instead of the original cost.
7. What is the main difference between SLM and WDV?
In the Straight Line Method, depreciation remains the same every year. In the Written Down Value Method, depreciation is higher in the initial years and gradually decreases.
8. Which depreciation method is easier to calculate?
The Straight Line Method is generally considered easier because the depreciation amount remains constant each year.
9. Which assets are suitable for the Straight Line Method?
Assets such as office furniture, buildings, fixtures, and office equipment are commonly depreciated using the Straight Line Method.
10. Which assets are suitable for the Written Down Value Method?
Machinery, vehicles, computers, electronic equipment, and other assets that lose value quickly are often depreciated using the WDV Method.
11. Is the depreciation rate the same every year under WDV?
Yes. The depreciation percentage remains the same, but the depreciation amount decreases because it is applied to the reduced book value.
12. Can different assets use different depreciation methods?
Yes. Businesses may use different depreciation methods for different categories of assets, depending on how those assets generate economic benefits.
13. Which depreciation method is more commonly used in accounting?
Both SLM and WDV are widely used. The choice depends on the nature of the asset, company policy, and applicable accounting standards.
14. Does the depreciation method affect profit?
Yes. Different depreciation methods can result in different depreciation expenses each year, which affects the reported accounting profit.
15. Can a company change its depreciation method?
Yes. A company may change its depreciation method if another method better reflects the pattern in which the asset's economic benefits are consumed, subject to applicable accounting standards.
16. What is book value?
Book value is the value of an asset shown in the accounting records after deducting accumulated depreciation.
17. Is residual value considered in the Straight Line Method?
Yes. Residual (scrap) value is deducted from the asset's cost before calculating annual depreciation under the Straight Line Method.
18. Does WDV always reduce an asset's value to zero?
Not necessarily. Since depreciation is calculated on the remaining book value, a small balance may remain unless adjusted at the end of the asset's useful life.
19. Why is choosing the correct depreciation method important?
Choosing the appropriate method ensures that depreciation reflects the actual use of the asset, resulting in more accurate profits and reliable financial statements.
20. What are some other methods of depreciation?
Other methods include the Units of Production Method, Machine Hour Method, Sum of Years' Digits Method, Double Declining Balance Method, and Annuity Method.
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