Depreciation in Accounting: Straight Line Method vs Written Down Value Method

What Is Depreciation?

Every business buys fixed assets like machinery, furniture, computers, or a delivery vehicle to run its operations for several years. But no asset lasts forever — it loses value over time because of use, age, or new technology replacing it.

This gradual, permanent and continuous fall in the value of a fixed asset is called depreciation.

In simple words, depreciation is the accounting method of spreading the cost of an asset over its useful life, instead of treating the entire cost as an expense in the year it was purchased.

Causes of Depreciation

• Wear and tear: Regular use of machinery, furniture, or vehicles causes physical deterioration.
• Efflux of time: Some assets, like a lease, lose value simply because time has passed, even without use.
• Obsolescence: A perfectly working machine may become outdated due to new technology.
• Depletion: Applicable to natural resources such as mines and quarries, which reduce in quantity as they are extracted.

Why Do Businesses Charge Depreciation?

Depreciation is charged for three main reasons that every Class 11 student should remember for theory questions:

• Matching Concept: The cost of an asset should be matched against the revenue it helps generate over its useful life, not dumped into a single year.
• True and Fair Financial Statements: Without depreciation, the Balance Sheet would show assets at their original cost even after years of use, overstating their real value.
• Provision for Replacement: Charging depreciation each year sets aside a portion of profit notionally so that funds are available when the asset needs replacement.

Straight Line Method (SLM) of Depreciation

The Straight Line Method, also called the Fixed Instalment Method or Original Cost Method, charges an equal amount of depreciation every year over the asset's useful life.

SLM Formula

• Depreciation amount remains the same every year.
• Book value of the asset can reduce to zero or scrap value by the end of its useful life.
• Best suited for assets that give equal benefit every year, such as furniture or a lease.

Written Down Value (WDV) Method of Depreciation

The Written Down Value Method, also called the Diminishing Balance Method or Reducing Balance Method, charges depreciation as a fixed percentage on the book value of the asset, not the original cost, each year.

Since the book value keeps reducing, the depreciation amount also keeps reducing every year.

WDV Formula

• Depreciation amount is higher in the earlier years and lower in later years.
• Book value can never technically reach zero under this method.
• This method is used under the Income Tax Act for computing depreciation on most blocks of assets for tax purposes.

SLM vs WDV: Key Differences

Real-Life Example: Depreciation on a Coaching Institute's Projector

Assume a coaching institute buys a projector for classroom teaching on 1 April 2024 for ₹1,00,000. Its estimated useful life is 5 years, with an estimated scrap value of ₹10,000.

Let us compare depreciation under both methods for the first three years.

Journal Entries for Depreciation

When charged directly to the Asset Account

When a Provision for Depreciation A/c is maintained

At year end, depreciation is transferred to Profit & Loss A/c

Frequently Asked Questions

Under SLM, depreciation is calculated on the original cost and remains constant every year. Under WDV, depreciation is calculated on the reducing book value each year, so the amount charged keeps decreasing over time.

The Income Tax Act, 1961 generally requires the Written Down Value (WDV) method for computing depreciation on blocks of assets under Section 32, though the specific rates are notified separately and should be checked for the relevant assessment year.

Yes. A company can use SLM or WDV for its books of accounts under the Companies Act, 2013, while being required to use WDV for computing taxable income under the Income Tax Act. This difference is a key reason deferred tax is created in company accounts.

No. Depreciation is a non-cash, notional expense. It reduces the book value of the asset and the reported profit, but no actual cash goes out when depreciation is recorded.

Because WDV applies a percentage to the remaining book value each year, and a percentage of any positive number is always greater than zero. Therefore, the book value keeps reducing but mathematically never reaches nil.

No. Land is generally not depreciated because it does not have a determinable useful life and typically does not wear out with use. Buildings on the land are depreciated separately.