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Written Down Value (WDV) Method

"Higher depreciation in early years when the asset is most productive."

The Written Down Value (WDV) Method, also called the Reducing Balance Method or Diminishing Balance Method, charges depreciation at a fixed rate on the reducing balance of the asset.

Concept

Under WDV:

  • Depreciation is charged at a fixed percentage on the book value (not original cost)
  • Higher depreciation in early years, lower in later years
  • Asset never reaches zero (theoretically)

Formula

Depreciation for Year = Book Value at Start of Year × Rate%

Where:

  • Book Value = Original Cost - Accumulated Depreciation

Example 1: Basic WDV Calculation

Data:

  • Machine purchased: ₹1,00,000
  • Depreciation rate: 20% WDV
  • Period: 4 years

Depreciation Schedule:

YearOpening ValueDepreciation @20%Closing Value
11,00,00020,000 (20% of 1,00,000)80,000
280,00016,000 (20% of 80,000)64,000
364,00012,800 (20% of 64,000)51,200
451,20010,240 (20% of 51,200)40,960

Notice: Depreciation amount decreases every year.

Journal Entries

Year 1:

Depreciation A/c             Dr.    ₹20,000
    To Machinery A/c                    ₹20,000

Year 2:

Depreciation A/c             Dr.    ₹16,000
    To Machinery A/c                    ₹16,000

And so on...

Comparison: SLM vs WDV

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Advantages of WDV

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Disadvantages of WDV

  1. Complex: More difficult to calculate than SLM.
  2. Never Zero: Asset never fully written off (theoretically).
  3. Fluctuating P&L: Different depreciation amounts make year-to-year comparison difficult.

Calculating WDV Rate

Given: Original cost, scrap value, useful life
Find: Rate of depreciation

Formula:

Rate = [1 - (Scrap Value / Original Cost)^(1/n)] × 100

Where n = number of years

Example 2: Finding Rate

Data:

  • Cost: ₹1,00,000
  • Scrap: ₹32,768
  • Life: 5 years

Calculation:

Rate = [1 - (32,768 / 1,00,000)^(1/5)] × 100
     = [1 - (0.32768)^0.2] × 100
     = [1 - 0.80] × 100
     = 0.20 × 100
     = 20% p.a.

WDV with Part-Year Purchase

Rule: Charge depreciation for the actual period of use.

Example 3: Mid-Year Purchase

Data:

  • Computer purchased on 1st October 2023: ₹60,000
  • Rate: 40% WDV
  • Financial year: April-March

Year 2023-24 (Oct to March = 6 months):

Full year depreciation = ₹60,000 × 40% = ₹24,000
For 6 months = ₹24,000 × 6/12 = ₹12,000
Closing Value = ₹60,000 - ₹12,000 = ₹48,000

Year 2024-25 (Full year):

Depreciation = ₹48,000 × 40% = ₹19,200
Closing Value = ₹48,000 - ₹19,200 = ₹28,800

When to Use WDV?

Best suited for:

  • Machinery and Equipment: Heavy wear in early years
  • Vehicles: Rapid value loss initially
  • Computers and IT Assets: Obsolescence is high early on
  • Plant and Equipment: Efficiency drops over time

Not ideal for:

  • Buildings (use SLM)
  • Furniture (use SLM)
  • Leasehold improvements (use SLM)

Real-World Example

Maruti Suzuki - Manufacturing Equipment

  • Cost of Robotic Assembly Line: ₹100 Crores
  • WDV Rate: 15% per annum
  • Year 1 Depreciation: ₹15 Crores
  • Year 2 Depreciation: ₹12.75 Crores (on ₹85 Cr)
  • Year 3 Depreciation: ₹10.84 Crores (on ₹72.25 Cr)

This high initial depreciation helps Maruti offset the high initial productivity and provides better tax savings in early years when cash flows need support.

Graphical View

If we plot depreciation over years:

  • SLM: Horizontal straight line (constant)
  • WDV: Downward sloping curve (decreasing)

Quiz: WDV Method

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