Straight Line Method and Written Down Method

The term "depreciation" originates from the Latin word 'depretium,' combining 'De' meaning decline and 'pretium' meaning price. Consequently, 'depretium' signifies the decline in asset value. Depreciation denotes the reduction in a company's asset value over time due to factors like use, wear and tear, and obsolescence. Simply put, it is the systematic allocation of an asset's cost throughout its useful lifespan. Depreciation is consistently applied to the asset's original cost, not its current market value, and is annually calculated based on the depreciable amount.

Methods of Calculation of Depreciation

• Straight Line Method
• Written Down Method

Straight Line Method

Uses:

• SLM finds common application in assets characterized by a steady rate of depreciation and a foreseeable useful life.
• Particularly suitable for assets such as buildings, office equipment, and vehicles, where significant technological advancements or substantial wear and tear are not anticipated.
• SLM is chosen when a uniform and predictable pattern of depreciation aligns with the nature of the asset .

Written Down Method

Uses:

• WDV is frequently employed for assets susceptible to swift depreciation or subject to rapid technological advancements.
• Well-suited for assets like computers, software, and machinery, where the decline in value is more pronounced in the initial years.
• WDV offers a more accurate reflection of an asset's genuine value, considering factors that influence its utility and worth over time.

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Advantages of the Straight Line Method

• SLM provides a structured and predictable approach for distributing depreciation expenses.
• This method is uncomplicated, making it well-suited for small businesses with limited accounting proficiency.
• SLM ensures a steady influence on financial statements, facilitating the analysis and comparison of assets over time.

Disadvantages of the Straight Line Method

• SLM does not accommodate the varying utility of an asset over time, neglecting factors like increased maintenance costs or obsolescence with age.
• The straight-line calculation may not accurately mirror an asset's genuine value, particularly in situations where depreciation is rapid initially and slows down later on.

Advantages of the Written Down Method

• WDV acknowledges that assets commonly depreciate more rapidly in their initial years and gradually in subsequent years, allowing for higher depreciation expenses early on, aligning with the asset's genuine decline in value.
• WDV factors in repairs, maintenance costs, and technological advancements, enhancing accuracy for assets susceptible to rapid obsolescence.

Disadvantages of the Written Down Method

• WDV involves a more intricate calculation process compared to SLM, introducing challenges in analysis and comparison due to varying depreciation rates.
• WDV may lead to fluctuating depreciation expenses, resulting in inconsistent impacts on financial statements, which can complicate financial analysis.

Difference Between Straight Line Method and Written Down Method