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Question : Discuss in detail the straight line method and written down value method of depreciation. Distinguish between the two and also give situations where they are useful?
Distinguish between the two and also give situations where they are useful?
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Solution
Answer : Straight Line Method : In straight line method of depreciation a fixed and an equal amount is charged as depreciation in every accounting period during the lifetime of an asset. The amount annually charged as depreciation is such that it reduces the original cost of the asset to its scrap value, at the end of its useful life.
In this case, depreciation amount is also calculated by dividing depreciable cost by the estimated life of the assets. It is also Fixed installment method because the amount of depreciation remains constant from year to year over the useful life of the asset.
Written Down Value Method : In written down value method, the depreciation is calculated at a fixed percentage of written down value of the asset. The method assumes that benefit acquiring to business by utilization of asset keeps on decreasing as the asset gets old. As the value of asset goes on decreasing from year to year, the amount of depreciation charged to different accounting years decreases with the passage of time.
Difference Between Straight line Method and Written Down Value Method.
Straight Line Method Written Down Value Method (i) Depreciation is charged on original cost of assets. (i) Depreciation is charged on Written down value of assets. (ii) Amount of the depreciation remains fixed every year. (ii) Amount of depreciation keeps on decreasing from year to year. (iii) It is not recognized by Income Tax Law. (iii) It is recognized by Income Tax Law (iv) Rate of depreciation can be calculated easily. (iv) It is complicated in calculation.
Suitability of Straight Line Method : This method depreciation is suitable to assets in which the repair charges are less and the possibility of obsolescence is less and expiration of cost depends upon time period involved.
Suitability of Written Down Value Method : This method of depreciation is suitable for assets which are affected by technological changes; require more repairs with passage of time.
In this case, depreciation amount is also calculated by dividing depreciable cost by the estimated life of the assets. It is also Fixed installment method because the amount of depreciation remains constant from year to year over the useful life of the asset.
Written Down Value Method : In written down value method, the depreciation is calculated at a fixed percentage of written down value of the asset. The method assumes that benefit acquiring to business by utilization of asset keeps on decreasing as the asset gets old. As the value of asset goes on decreasing from year to year, the amount of depreciation charged to different accounting years decreases with the passage of time.
Difference Between Straight line Method and Written Down Value Method.
| Straight Line Method | Written Down Value Method |
| (i) Depreciation is charged on original cost of assets. | (i) Depreciation is charged on Written down value of assets. |
| (ii) Amount of the depreciation remains fixed every year. | (ii) Amount of depreciation keeps on decreasing from year to year. |
| (iii) It is not recognized by Income Tax Law. | (iii) It is recognized by Income Tax Law |
| (iv) Rate of depreciation can be calculated easily. | (iv) It is complicated in calculation. |
Suitability of Straight Line Method : This method depreciation is suitable to assets in which the repair charges are less and the possibility of obsolescence is less and expiration of cost depends upon time period involved.
Suitability of Written Down Value Method : This method of depreciation is suitable for assets which are affected by technological changes; require more repairs with passage of time.
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