Straight line and written down value

Four facts decide the depreciation charge. The cost of the asset: its price plus everything spent to make it ready, such as freight, insurance on the way, installation, registration, and repairs needed before first use (for a second-hand asset too). The net residual value: what you expect to get for it at the end. The depreciable cost: cost minus residual value. And its useful life.

Straight line method (also called the original cost method): the same amount every year. Depreciation = (cost − residual value) ÷ useful life. A machine costing ₹85,000 with a residual value of ₹5,000 and a life of 8 years: 80,000 ÷ 8 = ₹10,000 a year. Draw the yearly charges on a graph and you get a straight line.

Written down value method (also called the reducing or diminishing balance method): a fixed rate on the book value left at the start of each year, so the charge gets smaller every year. The asset is never written down to zero.

Compare the two on an asset of ₹1,00,000 at 10%.

• Straight line: ₹10,000, ₹10,000, ₹10,000. Value after three years: ₹70,000.
• Written down value: ₹10,000 (10% of 1,00,000), then ₹9,000 (10% of 90,000), then ₹8,100 (10% of 81,000). Value after three years: ₹72,900.

In the first year, charge only for the months the asset was actually held. A plant of ₹1,00,000 bought on 1 July, books closing on 31 March, is held for 9 months: 10% × 9/12 = ₹7,500. A machine bought on 1 October is held for 6 months.

Which method suits what? The written down value method suits machinery: in early years depreciation is high and repairs are low, later depreciation is low and repairs are high, so the total stays fairly even. The straight line method suits assets that lose value evenly, like furniture, leases and patents.