What is Written Down Value Depreciation?

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Grade Level:

Class 12

AI/ML, Physics, Biotechnology, FinTech, EVs, Space Technology, Climate Science, Blockchain, Medicine, Engineering, Law, Economics

Definition

What is it?

Written Down Value (WDV) Depreciation is a method of calculating how much an asset's value decreases each year. With WDV, the depreciation amount is calculated on the asset's current book value (its value after previous depreciation), not its original cost. This means the depreciation amount gets smaller each year.

Simple Example

Quick Example

Imagine you buy a new smartphone for Rs. 20,000. Using WDV, if its value drops by 10% in the first year, the depreciation is Rs. 2,000. In the second year, the 10% depreciation is calculated on the *new* value (Rs. 18,000), making it Rs. 1,800. So, the value reduces by a smaller amount each year.

Worked Example

Step-by-Step

Let's say a delivery scooter costs Rs. 80,000. The WDV depreciation rate is 15% per year.

1. **Year 1 Depreciation:** Original Cost = Rs. 80,000. Depreciation = 15% of Rs. 80,000 = (15/100) * 80,000 = Rs. 12,000.
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2. **Year 1 Written Down Value:** Rs. 80,000 - Rs. 12,000 = Rs. 68,000.
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3. **Year 2 Depreciation:** Now, depreciation is calculated on Rs. 68,000. Depreciation = 15% of Rs. 68,000 = (15/100) * 68,000 = Rs. 10,200.
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4. **Year 2 Written Down Value:** Rs. 68,000 - Rs. 10,200 = Rs. 57,800.
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5. **Year 3 Depreciation:** Depreciation = 15% of Rs. 57,800 = (15/100) * 57,800 = Rs. 8,670.
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6. **Year 3 Written Down Value:** Rs. 57,800 - Rs. 8,670 = Rs. 49,130.

So, after 3 years, the scooter's Written Down Value is Rs. 49,130.

Why It Matters

Understanding WDV is crucial for businesses, big or small, to correctly value their assets like machines or vehicles. It's used in FinTech for financial modeling, in Engineering for project cost analysis, and even in Economics to understand capital wear and tear. Knowing this helps future chartered accountants, financial analysts, and business owners make smart decisions.

Common Mistakes

MISTAKE: Calculating depreciation on the original cost every year. | CORRECTION: In WDV, depreciation is always calculated on the *Written Down Value* (the value after previous depreciation) of the asset, not its initial cost.

MISTAKE: Confusing WDV with Straight Line Method (SLM) depreciation. | CORRECTION: WDV results in decreasing depreciation amounts each year, while SLM calculates the same depreciation amount every year.

MISTAKE: Forgetting to subtract the previous year's depreciation before calculating the current year's depreciation. | CORRECTION: Always find the new Written Down Value (Cost - Accumulated Depreciation) *first*, then apply the depreciation rate to this new value.

Practice Questions

Try It Yourself

QUESTION: A coffee vending machine was bought for Rs. 50,000. The WDV depreciation rate is 10% per year. What is the depreciation for the second year? | ANSWER: Rs. 4,500

QUESTION: A small manufacturing unit bought a new machine for Rs. 2,00,000. The WDV depreciation rate is 20% per year. Calculate the Written Down Value of the machine at the end of the third year. | ANSWER: Rs. 1,02,400

QUESTION: A delivery van was purchased for Rs. 6,00,000 on 1st April 2021. The company charges 15% WDV depreciation annually, closing its books on 31st March each year. What will be the depreciation charged for the financial year ending 31st March 2023? | ANSWER: Rs. 76,500

MCQ

Quick Quiz

Which of the following is true about Written Down Value (WDV) depreciation?

The depreciation amount remains constant every year.

It is calculated on the original cost of the asset each year.

The depreciation amount decreases each year.

It results in a higher book value than the Straight Line Method over time.

The Correct Answer Is:

In WDV, the depreciation is calculated on the asset's reducing balance (Written Down Value), causing the depreciation amount to be smaller each subsequent year. Options A and B describe the Straight Line Method.

Real World Connection

In the Real World

Many businesses in India, from a local kirana store with a deep freezer to large IT companies with servers, use WDV to calculate the value of their assets for tax purposes and financial reporting. For instance, a logistics company like Delhivery uses WDV to track the depreciating value of its fleet of delivery vehicles, which impacts their balance sheet and profit calculations.

Key Vocabulary

Key Terms

DEPRECIATION: The reduction in the value of an asset over time due to wear and tear, obsolescence, etc. | WRITTEN DOWN VALUE (WDV): The current book value of an asset after deducting accumulated depreciation. | ASSET: Something owned by a business that has value, like machinery, buildings, or vehicles. | BOOK VALUE: The value of an asset as recorded in a company's financial records.

What's Next

What to Learn Next

Great job understanding WDV! Next, you should explore the 'Straight Line Method of Depreciation'. Comparing WDV with SLM will help you understand the key differences and when each method is most suitable for different types of assets and businesses. Keep learning!