The Written Down Value (WDV) method, also known as the declining balance method, is an accelerated depreciation technique. Unlike the Straight Line Method (SLM) where an asset loses value at a constant rate, the WDV method applies a higher depreciation charge in the early years of an asset's life and gradually decreases over time.
Why is the WDV Method Used?
This method closely matches the actual physical wear and tear of most tangible assets. For example, a vehicle or a piece of heavy machinery loses a significant portion of its market value in the first few years of operation. Furthermore, the WDV method is the mandated depreciation method under the Indian Income Tax Act for tax deduction purposes, making it a critical calculation for corporate accounting.
The Core Formula
To calculate depreciation using this method, one must first determine the depreciation rate based on the asset's useful life and scrap value. The standard mathematical formula is:
Once the rate (R) is determined, it is applied to the remaining book value (Written Down Value) of the asset at the beginning of each subsequent financial year, rather than the original cost.
Impact on Corporate Taxes
Because depreciation is a non-cash expense that reduces taxable income, using the WDV method allows companies to claim larger tax deductions in the early years of an asset's acquisition. This provides an immediate cash flow benefit by deferring tax liabilities to later years.