The Written Down Value (WDV) method goes beyond mere calculations; it carries real-world significance that influences your financial choices, whether you are an individual or a business. For instance, when you encounter financial hurdles like unexpected cash flow shortages, the WDV becomes crucial. It directly affects the valuation of assets you might be considering as collateral, like your property.
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How does Written Down Value (WDV) work?
The Written-Down Value (WDV) method is a way to calculate depreciation by reducing an asset's value by a fixed percentage each year over its useful life. The percentage is determined based on the asset's expected lifespan.
Here is an example of how the WDV method works:
Suppose a company buys a piece of equipment for Rs. 1,00,000 and estimates its useful life to be 10 years. The company decides to apply the WDV method for depreciation.
The company calculates the annual depreciation by dividing the asset's original cost (Rs. 1,00,000) by its useful life (10 years). This results in an annual depreciation expense of Rs. 10,000.
Each year, the company records a depreciation expense of Rs. 10,000 and reduces the asset’s value accordingly. At the end of the first year, the WDV of the equipment would be Rs. 90,000 (Rs. 1,00,000 original cost minus Rs. 10,000 depreciation).
This process continues each year, with the WDV of the equipment decreasing by Rs. 10,000 annually. By the end of the 10th year, the WDV would be Rs. 0, as the entire Rs. 1,00,000 cost would have been depreciated.
Importance of written down value (WDV)
The WDV method of depreciation is crucial as it provides a more accurate book value of an asset. It takes into account the fact that an asset’s ability to generate revenue decreases over time, thus reducing its value. This method is widely used in India and is mandated by the Income Tax Act.
What is the calculation method of Written Down Value (WDV)?
The calculation of Written Down Value (WDV) involves a specific formula:
R = 1 - (s/c)^(1/n)
In this formula,
- s represents the scrap value at the end of the period n.
- c is the current Written Down Value.
- n is the useful life of the assets.
Once the Rate of Depreciation is calculated, it is used to determine the depreciation for the year. This is done by multiplying the rate (in percentage) by the Written Down Value at the beginning of the year. The result gives you the depreciation for that year. This process is repeated each year to calculate the depreciation and update the Written Down Value of the asset.
Advantages of Written Down Value (WDV) method
- More accurate: The written down value method of depreciation provides a more accurate representation of an asset’s value over time.
- Tax benefits: Since this method results in higher depreciation in the initial years, it can lead to tax benefits for businesses.
- Reflects reality: The WDV method of depreciation better reflects the reality of asset usage, as assets are often more productive in their early years.
- Less complex: Compared to other methods, the WDV method is less complex and easier to understand and implement.
- Widely accepted: The WDV method is widely accepted and used, especially in India, making it a standard practice.
Disadvantages of Written Down Value (WDV) method
- Lower profit: Since depreciation is higher in the initial years, it may result in lower profits during those years.
- Time consuming: Calculating WDV can be time-consuming as it requires detailed records of asset usage and depreciation.
- Not suitable for all assets: The WDV method may not be suitable for assets that do not lose their value over time.
- Inconsistent depreciation: This method can lead to inconsistent depreciation charges over the years.
- Complex calculations: While the concept is simple, the calculations can get complex, especially for multiple assets.
Application of WDV in accounting
In accounting, the WDV method is used to calculate depreciation for the Block of Assets. It is a group of assets falling within a class of assets comprising tangible assets and intangible assets.
Understanding WDV not only helps you grasp the depreciation of your assets but also empowers you to make informed decisions when choosing financial products like Bajaj Finserv Loan Against Property.
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