Difference Between Straight Line and Written Down Value Method Of Depreciation

Edited by Diffzy | Updated on: September 21, 2022

       

Difference Between Straight Line and Written Down Value Method Of Depreciation Difference Between Straight Line and Written Down Value Method Of Depreciation

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Introduction

Depreciation demotes the value of the asset that has been ised up. It allows companies to earn income from the assets they own by paying for them over some time.

Since companies do not have to account for them in the year the assets are acquired, the immediate cost of ownership is greatly reduced. Not accounting for depreciation can significantly affect a company's profits. Businesses can also depreciate fixed assets for both tax and accounting purposes.

Depreciation can be compared to amortization, which takes into account the change in the value of intangible assets over time. Assets such as machinery and equipment are expensive. Instead of realizing the full cost of an asset in the first year, companies can use depreciation to spread the cost and match the depreciation expense with the related revenue in the same reporting period. This allows the company to depreciate the value of the asset over some time, especially over its useful life.

Companies regularly depreciate to move the cost of their assets from the balance sheet to the income statement. When a company buys an asset, it records the transaction as a debit to increase the asset account on the balance sheet and a credit to decrease cash (or increase liabilities), which is also on the balance sheet. No journal entry affects the income statement, where revenues and expenses are reported.

What is a Straight Line Method?

The basis of a straight line is the method of calculating depreciation and amortization. Also known as a line break, it is an easy way to detect the loss of asset value over time. The basis of a straight line is calculated by distinguishing the difference between the cost of the asset and its expected redemption amount by the number of years expected to be used.

In accounting, there are many different agreements designed to match sales and costs over time. One consortium the companies receive is called inflation and inflation. Companies use depreciation of tangible assets, as well as the depreciation of intangible assets such as patents and software. Both of these agreements are used for the cost of the asset for a long time, not just when it was purchased. In other words, companies can extend the cost of an asset at many different times, allowing them to benefit from the asset without deducting the full cost of residual income (NI). The challenge is to determine how much money will be spent. Another method accountants use to determine this amount is the straight-line foundation method. To calculate the basis of a straight line, take the purchase price of the asset and subtract the reserve value, its estimated sales value when it is no longer expected to be required. Then divide the resulting number by the total number of years the asset is expected to be useful, which is referred to as the useful life in accounting jargon.

Straight-line depreciation is a common method of depreciation when the value of a fixed asset is reduced over its useful life. It is used to reduce the carrying amount of immovable property during its useful life. With a decrease in a straight line, the cost of goods decreases the same amount for each calculation time. Suppose a business bought a machine for 10,000 rupees. They estimated the useful life of the machine to be 8 years at a saving cost of 2,000 rupees. Now, according to the straight-line method of depreciation: Cost of goods = 10,000 rupees. Salvage Value = 2000 rupees.

Suppose Company A buys a piece of equipment for 10,500 rupees. The device has a life expectancy of 10 years and a redemption value of 500 rupees. To calculate the linear decline, the accountant distinguishes the difference between the value of the asset and the cost of the asset — also called the depreciation basis or cost of the asset — over the expected duration of the asset. Accountants prefer the straight-line method because it is easy to use, makes few mistakes in the life of an asset, and costs the same amount every time an accountant. Unlike sophisticated methods, such as double depreciation, a straight line is simple and uses only three variables to calculate the value of the depreciation period for each calculation. However, the simplicity of a straight line foundation is also one of its major obstacles. One of the most obvious pitfalls of using this method is that the calculation of useful life is based on speculation. For example, there is always the risk that technological advances may make the asset inoperable ahead of time. In addition, the basis of a straight line does not involve immediate loss of value of the asset in the short term or the possibility that it will cost more to maintain it as it grows.

What is the Written-Down Value of Depreciation?

A recorded value is the amount of the asset after accounting for depreciation. In short, it reflects the current value of the company held by the accounting entity. This amount is included in the company's balance sheet in its financial statements. A written value is also called a book value or total book value. A recorded value is the amount of the asset after accounting for depreciation. Depreciation is applied to intangible assets while depreciation is applied to intangible assets. The present value of a previously purchased asset is represented by its written value. The transaction amount appears on the balance sheet and is calculated by subtracting the accumulated depreciation or amortization of the total value of the asset. Recorded value is used to monitor the value of an asset and its value at the time of sale.

In accounting, there are various agreements designed to better match the transaction and the timeframe. Another way companies often accept is called inflation or inflation. Companies often use depreciation of tangible assets, such as machinery, and reductions in the value of intangible assets, such as patents and software. Both approaches allow firms to use economic value resources over a set period. In other words, instead of deducting the total purchase price from the immediate income (NI), companies can extend the cost of the asset at many different times.

Recorded value is the method used to determine the present value of a previously purchased asset and is calculated by subtracting the accumulated depreciation or decrease in the carrying amount of the asset. The resulting value will appear on the company's balance sheet.

Depreciation can be used to document the amount of debt or intangible assets and is more complex than depreciation methods. The volume of the asset book is reduced to the company's books following the prescribed schedule. Different methods can be used to pay for different types of goods. Intangible assets, such as patents, are usually recorded annually. Bonds, on the other hand, often use a more efficient way of making a profit. At the same time, the outstanding loan reduction rates generally follow the repayment schedule by dividing interest and interest. Other ways to reduce the amount of money are available and that include balancing the balloon and balloon. The recorded value of the reduced asset is important because it helps the company to keep tabs on it. If the fine is zero, it can be derecognised or may need to be renewed.

The recorded value can be calculated in the form of depreciation which is sometimes called the depreciation method. This calculation method reduces the number of assets by a fixed percentage each year. Various other depreciation strategies are also available in accounting and are used to finance the cost of different types of assets. One example is a decrease in the value of a straight line, which draws the same cost annually based on dividing the difference between the cost of the asset and its expected redemption amount by the number of years expected to be used.

The recorded value of the depreciated asset is significant because it is included in the total amount of the company's assets. Reduced goods usually start in the books at their purchased price and are usually sold before they are reduced to zero. The reduced value of an asset is also important in helping to determine the selling price of an asset. When you sell a property, the value of the book is used to determine the minimum amount at which it will be sold.

Real assets are usually sold at a price range within their book value and a fairly high market value. If the profit arises from the sale of the property, it will be taxed in most cases. Auction-based profits are usually determined by comparing the sale of an item with its written value.

Difference Between Straight Line and Written Down Value of Depreciation in Tabular Form

Table: Straight Line vs. Written Down Value of Depreciation Method
Properties
Straight line
Written down value
Meaning
 Also known as a line break, it is an easy way to detect the loss of asset value over time.
A written value is also called a book value or total book value. A recorded value is the amount of the asset after accounting for depreciation or depreciation.
Rate
Changes as the value of depreciation charged is constant.
It remains the same as long as the asset is useful.
Asset value
Fully becomes zero.
Never becomes zero.
Charge
Is usually lower.
It is higher.
Understanding
Easily interpreted by anyone and understood for the depreciation.
Slightly more complicated than the straight-line method.

Difference Between Straight Line and Written Down Value of Depreciation in Points

  • A straight line is a method of depreciation where the fixed depreciation rate is charged over the useful life of the asset. recorded value is the method of depreciation in which the depreciation is charged at a predetermined amount of the change in the carrying amount of an asset as it arises at the beginning of each calculation period.
  • Below the straight line, depreciation is charged each time accounting for the actual cost of fixed assets. Below the Quotation, a depreciation charge is charged for each opening of the opening book value i.e., the book value as reduced by the accumulated depreciation decrease.
  • Under SLM, the annual depreciation rate is determined and remains unchanged at all accounting times. Under WDV, depreciation varies and decreases with each passing year.
  • Below the Straight line, the volume of a book decreases with its scrap value or becomes zero at the end of its use. It has therefore been completely removed from its useful life. Under the value of a note, depreciation is charged for a reduced amount of the book which means that the depreciation charge continues to decline each year. So the value of the book is not completely erased.
  • If the business follows a straight line, then in comparison with the Written amount, the declining interest rate will decrease in the first years. If the business follows a record price, then compared to a straight line, the downtrend will be higher in the early years. As the decline in the depreciation balance continues to decline year on year, the decline in the straight line will eventually be higher than the decrease in the downside value.
  • The straight-line method is preferred for non-fixed assets whose use is evenly distributed throughout their service life. For example, intangible assets such as patents and copyrights have a specified legal life meaning that businesses generally receive benefits from such assets continuously over the years, hence, the Straight line method may be subject to its reduction. Written down value is best applied to durable materials with a high degree of ageing or sadness or expiration that is, their benefits higher in the early years than in later years. For example, the Written down value method may be more suitable in the case of plants and equipment or technology-related goods etc.
  • Depreciation below the Straight line is expressed as the number of years the asset should be depreciated or as a% of the actual cost. Depreciation Depreciation is generally expressed as% per annum and is then applied to the opening price of an immovable asset each year.
  • Under the Straight line method, the impact on profits has not changed for all accounting periods as the same amount is charged to the profit and loss account for each accounting period. Under the written price method, the depreciation rate is accelerated in the early years, which is why interest and loss account charges are also higher in the early years. Profits underwritten down value will therefore decrease significantly in the early years.
  • Depreciation follows the accounting principle of comparing revenue and expenditure. This means that expenses should be recorded in the books of account in the years in which the related revenue is recognized. Fixed assets generate business revenue within a few years; appropriately its costs were also divided within a few years in the form of a depreciation charge. The correct depreciation method depends on the nature of the asset and how it will be used in the business.
  • The straight-line approach assumes that depreciation is a function of time and is reasonably appropriate for those assets that provide equitable use for each year of their useful life. Written down value (WDV), on the other hand, is often designed for those assets whose service is reduced by their business use over time. Proponents of this theory argue that the movable property is generally more productive in the early years of its existence and less productive in later years; therefore, it is entirely appropriate to charge for further depreciation in the early years and less in recent years.

References

  • https://www.fool.com/the-blueprint/straight-line-depreciation/
  • https://www.termscompared.com/straight-line-vs-written-down-value-wdv-method-of-depreciation/

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