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What is the difference between the straight line method and the written down value method of depreciation?

GradeHunt_TeamGradeHunt Team · · CMA Inter

In CMA Inter Financial Accounting, which depreciation method gives a higher charge in early years and how do I change from one method to the other?
depreciationslmwdvas 10

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Straight line method (SLM): - Depreciation = (Cost - Residual value) / Useful life. - Same amount every year. - Simple and suits assets that give equal benefit each year, like buildings. Written down value method (WDV): - Depreciation = a fixed rate x opening book value. - The amount falls every year because the base reduces. - Suits assets that give more benefit in early years and need more repairs later, like vehicles and machinery. - Higher charge in early years, lower later. Example: cost Rs 1,00,000, useful life 5 years. - SLM (nil residual): Rs 20,000 every year. - WDV at an assumed rate of 40%: Year 1 Rs 40,000, Year 2 Rs 24,000, Year 3 Rs 14,400, Year 4 Rs 8,640, Year 5 Rs 5,184. WDV gives a higher charge than SLM in Years 1 and 2 and a lower charge from Year 3. For the same useful life and residual value, the WDV rate always works out higher than the SLM rate, because it is applied to a falling balance. At the same 20% rate, WDV would never charge more than SLM. WDV never brings the book value down to exactly nil (here Rs 7,776 is left after 5 years). When a question asks for the exact rate, use: Rate = 1 - (Residual value / Cost)^(1/n), where n is the useful life in years. Changing the method: Under the current Accounting Standards (AS 10 Property, Plant and Equipment, and the corresponding Ind AS 16), the depreciation method is reviewed at least at each financial year-end. It is changed only if the expected pattern of benefit from the asset has changed significantly. The change is treated as a change in accounting estimate (AS 5 / Ind AS 8), applied prospectively: the remaining carrying amount, less residual value, is depreciated over the remaining useful life using the new method. Earlier depreciation is not recalculated. Older questions based on the old AS 6 (Depreciation Accounting) may expect a retrospective adjustment, so read the question's framework carefully. Exam tip: for a change-of-method question, state the standard and whether the change is prospective, then show the new charge for the current year. That line on treatment is the core of the answer, so do not skip it.
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