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