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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.

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Solution

Straight Line Method In the 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, the depreciation amount is also calculated by dividing the depreciable cost by the estimated life of the assets. It is also called Fixed instalment 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 accruing to business by utilisation of asset keeps on decreasing as the assets get old. As the value of the asset goes on decreasing from the 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

S.N.Straight Line MethodWritten Down Value Method(i)Depreciation is charged on originalDepreciation is charged on writtencost of assets.down value of assets.(ii)Amount of depreciation remains fixedAmount of depreciation keeps onevery year.decreasing from year to year.(iii)It is not recognised by Income Tax LawIt is recognised by Income Tax Law(iv)Rate of depreciation can be calculatedIt is complicated in claculation.easily.

Suitability of Straight Line Method This method depreciation is suitable for assets in which the repair charges are less and the possiblity 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 the passage of time.


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