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Depreciation: It is the allocation of the depreciable amount of an asset over estimated useful life.

Written Down Value Method (WDV) of Depreciation


It is also known as Reducing Balance or Reducing Installment Method or Diminishing Balance
Method.
Written-down value is the value of an asset after accounting for depreciation or amortization, and
it is also called book value or net book value. It is calculated by subtracting accumulated
depreciation or amortization from the asset's original value, and it reflects the asset's present
worth from an accounting perspective.

Merits
It is considered more equitable than straight-line method.
It matches the service of the asset with the depreciation charge. When asset is more
efficient in the initial years, higher depreciation is charged compared to later years.
It recognizes the risk of obsolescence by charging the major part of depreciation in the
early years of the life of the asset.
It results in a better cash flow through tax deferral
Demerits
In subsequent years the original cost of the asset is completely lost sight of.
The asset can never be reduced to zero.
This method does not take into consideration the interest on capital invested in the asset.
This method requires elaborate book-keeping. The determination of correct rate of
depreciation is a complex task.
Straight Line Method
A method of depreciation in which a fixed amount is written off year on year, during the useful
life of the asset, to reduce the value of the asset to zero or its scrap value.
In this method, the cost of the asset is uniformly spread over the lifetime of the asset. This
method is also known as fixed installment method.

Advantages of straight line depreciation method

- Simplest depreciation method to compute


- Can be applied to all long-term assets
- The same for each period of assets service life
- Widely acceptable and usable accounting method
Disadvantages of straight line depreciation method
- Does not reflect accurately the difference in usage of an asset from one period to the other
- Does not necessary match costs with revenues in different types of long-term assets
- Might not be appropriate for some depreciable assets due to rapidly developing technology,
such as computers
Annuity Method of Depreciation'
Every year the asset is debited with the amount of interest and credited with the amount of
depreciation. This interest is calculated on the debit balance of the asset account at the beginning
of the year. depends upon the rate of interest and the period over which the asset is to be written
off. The rate of interest and the amount of depreciation would be adjusted in such a way that at
the end of its working life, the value of the asset would be reduced to nil or its scrap value.

SLM Vs WDV

BASIS FOR
COMPARISO
N

SLM

WDV

Meaning

A method of depreciation in which


the cost of the asset is spread
uniformly over the life years by
writing off a fixed amount every year.

A method of depreciation in which


a fixed rate of depreciation is
charged on the book value of the
asset, over its useful life.

Calculation of
depreciation

On the original cost

On the written down value of the


asset.

Annual
depreciation
charge

Remains fixed during the useful life.

Reduces every year

Value of asset

Completely written off

Not completely written off

BASIS FOR
COMPARISO
N

SLM

WDV

Amount of
depreciation

Initially lower

Initially higher

Impact of
repairs and
depreciation on
P&L A/c

Increasing trend

Remains constant

Appropriate for

Assets with negligible repairs and


maintenance like leases, copyright.

Assets whose repairs increase, as


they get older like machinery,
vehicles etc.

Capital Expenditure:
Capital expenditure is that expenditure, the benefit of which is not fully consumed in one period
but spread over periods i.e. the benefits is expected to accrue for a long time. Any expenditure
which gives the following outcomes is a capital expenditure:
(i) Increases the capacity of an existing asset.
(ii) Increases the life of an existing asset.
(iii) Increases the earning capacity of the concern.
(iv) Results in the acquisition of a new asset.
(v) Decreases the cost of production.
Revenue Expenditure:
An expenditure which is consumed during the current period and which affects the income of the
current period is called revenue expenditure.
Following are the examples of revenue expenditure:

Expenses of administration, expenses incurred in manufacturing and selling products.


Replacements for maintaining the existing permanent assets.
Costs of goods purchased for resale.
Depreciation on fixed assets, interest on loans for business, etc

BASIS FOR
COMPARISO
N

CAPITAL EXPENDITURE

REVENUE
EXPENDITURE

Meaning

The expenditure incurred in acquiring a capital


asset or improving the capacity of an existing
one, resulting in the extension in its life years.

Expenses incurred in
regulating day to day
activities of the
business.

Term

Long Term

Short Term

Economic
benefits

Capital expenditure generates future economic


benefits

Revenue expenditure
generates benefit for
the current year only.

Shown in

Income Statement & Balance Sheet

Income Statement

Nature

Capital expenditure is a one-time investment of


money

Revenue expenditure
occurs frequently.

Benefit

More than one year

Only in current
accounting year

International Financial Reporting Standards (IFRS Standards)


IFRS is a single set of accounting standards, developed and maintained by the International
Accounting Standards Board (the Board) with the intention of those standards being capable of
being applied on a globally consistent basisby developed, emerging and developing economies
thus providing investors and other users of financial statements with the ability to compare the
financial performance of publicly listed companies on a like-for-like basis with their
international peers.