Straight Line Method

The Straight Line Method (SLM) of depreciation reduces the asset’s value by a fixed amount every year till it reaches zero or scrap value. It is also known as the ‘Fixed Installment Method’ or ‘Original Cost Method’. This method calculates the annual depreciation amount using the below formula:

Depreciation = (Original Cost – Estimated Scrap Value) / Estimated Useful Life

Where:

Original Cost: Purchase price of the asset.

Estimated Scrap Value: Asset’s value at the conclusion of its useful life.

Estimated Useful Life: No. of years that the asset can be of use.

Advantages of SLM

The advantages of using the Straight Line Method (SLM) to calculate depreciation are as follows:

• Ease of calculation – SLM is the easiest method to compute the depreciation of an asset. This method can help reduce the asset to zero or scrap value and write them off from the account books. You can also calculate the total depreciation amount that is charged during the life of an asset in this method by multiplying the yearly depreciation amount with the number of years of an asset’s usage.
• Consistency – There is uniformity in terms of the depreciation amount. The amount of depreciation remains the same every year, making it easier to compare the organisation’s profits. This amount gets reduced from the Profit and Loss Account on an annual basis.
• Suitable for small businesses – This method is helpful for firms operating on a relatively smaller scale. Most of their assets are inexpensive and get used up easily due to regular wear and tear. So, calculating depreciation on these assets becomes simpler using the Straight Line Method.

Written Down Value Method

Written Down Value (WDV) Method uses a fixed percentage to calculate the depreciation of an asset every year. It is also known as the ‘Reducing Installment Method’ or the ‘Diminishing Balance Method’. The formula for computing depreciation under this method is as follows:

Depreciation = (Original Cost – Estimated Scrap Value) * Rate of Depreciation.

Where:

Original Cost: Purchase price of the asset.

Estimated Scrap Value: Asset’s value at the conclusion of its useful life.

Rate of Depreciation: A fixed percentage that applies against the net book value of an asset.

Advantages of WDV

The advantages of using the Written Down Value method are as follows:

• Practical method – The WDV method considers that an asset will be more efficient in its early years. It is the main reason why the amount charged for depreciation is higher in the initial years.
• Uniform effect on Profit and Loss account – An asset requires less maintenance and repairs in its initial years. After a few years of usage, the repair costs start to rise. As the WDV method leads to higher depreciation in the early years, the expenses for both depreciation and repairs remain constant throughout the life of an asset.
• Official method – Unlike the Straight Line Method, WDV is recognised by Income Tax Authorities for calculating depreciation.
• Suitability – This method is suitable for assets with a longer life span that require more repairs as they become older.

Conclusion

Both SLM and WDV have benefits for any organisation that wants to estimate the value of its assets over a certain period. Companies should check the suitability of these methods to calculate the depreciation of their assets to make an informed choice.

Also See

• What is Depreciation?
• Difference between Standard Costing and Budgetary Control