What does ‘written down value’ of an asset mean?

Sujan Afi S

Introduction

The value of various tangible and intangible assets like real estate properties, machineries, patents and software is not fixed. With the progress of time the value of this assets reduced due to depreciation or amortization. Depreciation of assets mainly caused due to wear and tear of assets with the progress of time. Therefore, it is very important to calculate the current value of an asset and for this purpose the method of ‘written down value’ is developed.

What is ‘written down value’?

‘Written down value’ method is the most common way of calculating the depreciation of an asset whether it is tangible or intangible. In a very simple word it refers to the present worth of an asset. It is the present value of an asset after accounting depreciation or amortization. In the way of calculating the written down value of various tangible and intangible assets, depreciation is important for various tangible assets and amortization is important for various intangible assets. The loss of value of a previously purchased asset is very common due to its use or progress of time and need to evaluate its present value and ‘written down value’ is considered as most important way of calculating the present value of an asset. After calculating the written down value of various assets of a company it is updated to the balance sheet of the company for future financial statement. Written down value method is also known as the reducing-value method or the reducing balance or the reducing installment method or the diminishing balance method.

Written down value in sometimes called to be book value or net book value.

Why is ‘written down value’ method important?

Calculation of depreciation through the method of written down value has various importance, such as –

  1. The main important of calculating written down value of various assets is for tax purpose. You need to pay tax over your assets value and calculating the written down value of your assets may offer you tax benefits. According to the Section 32 of Income Tax Act 1961 you can claim tax benefits due to depreciation in the value of the assets. 
  2. Written down value of an asset is also important to calculate before selling an asset. Before selling an asset it is very important to know its present market value. If you have information like the written down value of an asset then it will help you a lot in the process of bargaining while selling the assets.
  3. As an owner of a company you should be clear about the total present worth of the assets owned by your companies. To ascertain the ultimate profits and losses in a financial year or any time of the year you must calculate the written down value of the all assets of your company. Written down value of the assets act as an indicator of real profits or losses of your company and without the calculation of written value you may mislead about the real profits or losses of your company due to wrong evaluations.

How to calculate depreciation through ‘written down value’ method?

The written down value method is the most common way of calculating depreciation of assets and in this method it is considered that the assets provides more value in its initial years than later years. There are two ways of calculating written down value of the assets, such as –

  1. Amortization Methods: In this method the value of intangible assets like software, patent etc. are calculated and this method is generally more complicated than depreciation method. Various ways of amortization method is applicable on various intangible assets depending on the nature of intangible assets. For example,  patents are typically written-down annually, for intangible assets like bonds  effective interest method of amortization is generally use, the method  amortization schedule is used for calculating the written down value of software etc. 
  1. Depreciation Methods: The formula of calculating depreciation in written down value method are – Rate of Depreciation (R) = 1 – [s/c]1/n

              Where, ‘s’ stands for the scrap value at the end of the period, that is ‘n’.

                          ‘c’ stands for the written down value at present.

                          ‘n’ is the useful life of the asset.

Note: The useful life of different assets is clearly mentioned in the Schedule II of companies Act and according to this the useful life of a building is 60 years if it is other than factory building with RCC frame structure and in case of building other than RCC frame structure it is 30 years.

Example: The written down value method is applicable on the book value of an asset and the book value is reduce with the progress of time.

If the cost of an asset is 1,00,00,000 then the depreciation amount for the first year will be Rs 10,00,000 when the rate of depreciation is 10% for first year.

Depreciation for the second year = 10% of Rs 90,00,000 (i.e., 10% of Rs 90,00,000) = Rs 9,00,000.

Depreciation for the third year = 10% of Rs 81,00,000 (i.e., 10% of Rs 81,00,000) = Rs 8,10,000.

Conclusion

Although the ‘written down value’ method is recognised as most popular way of calculating the current value of an asset but it also has some limitation. For example – year after year the original cost of the asset loss its attention in written down value method, the value of an asset can never be brought into zero but in the diminishing way of calculation through written down value method the asset value may be appeared as zero, and even the interest on the capital which is generally invested in various assets of a company is also not taken into account in this method. 

However, this ‘written down value’ method is considered to be best method for calculating the depreciation value of a plant, machinery or even a vehicle.

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