Written Down Value (WDV) Method of Depreciation: A Complete Guide

 

Definition of WDV Method

The Written Down Value (WDV) Method is a widely used depreciation technique in accounting where the asset’s value reduces each year at a fixed percentage of its book value (rather than its original cost). Under this method, depreciation is charged on the diminishing balance of the asset, meaning the expense decreases with each year.

Meaning of WDV Method in Detail

The WDV method, also known as the Reducing Balance Method or Diminishing Balance Method, assumes that assets provide more benefits in their early years and gradually lose efficiency or productivity as time passes. Hence, a higher depreciation is charged in the initial years and lower in the later years.

This method aligns well with the principle of matching revenue with expenses since many assets, such as machinery, deliver more output in their initial years.

In India, the Income Tax Act, 1961 specifically prescribes the WDV method for calculating depreciation for tax purposes. Most companies, especially in manufacturing, adopt this method for tax computation, while they may use the straight-line method for financial reporting.

Formula for WDV Method

The formula for calculating depreciation under the WDV method is:

$$\text{Depreciation} = \text{WDV of Asset at Beginning of Year} \times \text{Rate of Depreciation (\%)}$$

At the end of the year,

$$\text{Closing WDV} = \text{Opening WDV} - \text{Depreciation}$$

Example Calculation

Suppose a company purchases machinery worth ₹1,00,000 at a depreciation rate of 20% per annum using the WDV method.

• Year 1:
  Depreciation = 1,00,000 × 20% = ₹20,000
  Closing WDV = 1,00,000 – 20,000 = ₹80,000

• Year 2:
  Depreciation = 80,000 × 20% = ₹16,000
  Closing WDV = 80,000 – 16,000 = ₹64,000

• Year 3:
  Depreciation = 64,000 × 20% = ₹12,800
  Closing WDV = 64,000 – 12,800 = ₹51,200

Journal Entries for WDV Method

When depreciation is charged:

Entry:

Depreciation A/c     Dr.  
     To Asset A/c  

When depreciation account is transferred to Profit & Loss:

Profit & Loss A/c    Dr.  
     To Depreciation A/c  

Example:
Machinery purchased for ₹1,00,000, depreciation charged at ₹20,000 in year one.

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

• Profit & Loss A/c Dr. 20,000
  To Depreciation A/c 20,000

Detailed Illustration

Year	Opening WDV	Depreciation (20%)	Closing WDV
1	1,00,000	20,000	80,000
2	80,000	16,000	64,000
3	64,000	12,800	51,200
4	51,200	10,240	40,960

Key Features of WDV Method

• Depreciation is charged on the reduced balance of the asset.

• Annual depreciation expense decreases over time.

• Asset value never becomes zero but reduces significantly.

• More suitable for assets with higher productivity in initial years.

• Mandated under Income Tax Rules in India.

Importance of WDV Method in Business

• Ensures realistic allocation of costs matching asset usage.

• Provides tax benefits due to higher depreciation in initial years.

• Reduces taxable income in the early years, allowing businesses to save cash.

• Commonly adopted for plant & machinery, vehicles, and industrial equipment.

Advantages and Disadvantages

Advantages:

• Matches revenue with expenses.

• Suitable for wear-and-tear heavy assets.

• Provides higher tax shield initially.

• Simple to apply under tax rules.

Disadvantages:

• Complicated for financial reporting when compared to SLM.

• Asset value never reaches zero (residual balance always remains).

• Not suitable for intangible assets or short-term assets.

Usage of WDV Method

• Tax computation in India under Income Tax Act.

• Used in businesses with heavy machinery.

• Preferred when asset utility is higher in initial years.

• Applied for depreciation of fixed assets like vehicles, equipment, and tools.

Case Studies

• Tata Motors: Uses WDV method for tax reporting on plant & machinery depreciation.

• Manufacturing Sector in India: Almost all factories adopt WDV for Income Tax compliance.

• Small Businesses: For cost-effective tax savings, proprietors use WDV instead of SLM.

Practical Example

A company ABC Ltd. buys equipment worth ₹5,00,000 with a 15% depreciation rate.

• Year 1 Depreciation = ₹75,000

• Year 2 Depreciation = ₹63,750

• Year 3 Depreciation = ₹54,187.50

This shows declining depreciation, helping ABC Ltd. match the asset’s utility with its expense pattern.

Common Mistakes in WDV Method

• Applying depreciation on original cost instead of WDV.

• Ignoring tax rules related to block of assets.

• Not considering addition or disposal of assets during the year.

• Misinterpreting WDV as suitable for all assets (not ideal for intangibles).

Real-Life Applications

• Income Tax Filing: Businesses in India must compute depreciation using WDV method for tax purposes.

• Corporate Finance: Used to determine the fair book value of assets in balance sheets.

• Mergers & Acquisitions: WDV helps in valuing machinery while determining purchase consideration.

• Auditing: Auditors cross-check WDV depreciation for tax compliance.

FAQs

Q1: Is WDV Method compulsory in India?
Yes, under the Income Tax Act, 1961, companies must use WDV for tax depreciation.

Q2: What is the difference between WDV and SLM?
In WDV, depreciation decreases yearly, while in SLM it remains constant.

Q3: Can WDV be applied to intangible assets?
No, generally intangibles like goodwill, patents use straight-line method.

Q4: Why does WDV never reach zero?
Because depreciation is charged on a diminishing balance, not on the original cost.

Q5: Is WDV better for tax saving?
Yes, since it allows higher depreciation in initial years.

Expert Tip from Learn with Manika

When preparing financial statements, use Straight Line Method (SLM) for better presentation to investors, but always use WDV Method for tax compliance in India. Maintaining both records ensures clarity and avoids disputes during audits.

Related Terms

• Straight Line Method (SLM)
• Depreciation
• Block of Assets
• Accumulated Depreciation
• Residual Value
• Useful Life of Asset