Calculating Depreciation: Written-down-value Method

The written-down value method, also called the declining balance method, is a depreciation technique where assets lose value more rapidly in early years and slower in later years. It results in higher depreciation charges initially, reflecting that machinery is more productive and valuable when new. This method works well for assets like technological equipment that depreciate quickly.

Unlike the calculating depreciation straight line method, which applies a constant depreciation rate annually, the written-down value method applies the depreciation rate to the declining book value each year. This creates a decreasing depreciation expense over time rather than equal annual charges, better matching asset productivity to actual value loss.

Companies use this method because it aligns depreciation with actual asset usage patterns and repair costs. Early-year higher depreciation offsets lower repair expenses, while later-year lower depreciation offsets rising maintenance costs. This approach improves financial planning and reporting by better matching expenses to asset productivity throughout its useful life.

Apply the depreciation rate to the net book value at the start of each year. For example, machinery purchased for $100,000 at 20% annual depreciation yields $20,000 in year one. Year two applies 20% to the remaining $80,000 book value, resulting in $16,000 depreciation. Each subsequent year, the rate applies to the reduced book value.

The written-down value method works best for assets that lose value quickly, such as technological equipment, vehicles, and machinery. These assets are highly productive when new but decline rapidly in efficiency and market value. The method accurately reflects their actual depreciation pattern compared to assets with steady, linear value loss.

Higher depreciation in early years reduces reported profits initially, lowering income statement expenses and asset values on the balance sheet. As depreciation decreases over time, later-year profits appear higher. This front-loaded expense recognition can improve financial planning and provide tax advantages early in an asset's useful life.

Net book value is the asset's original cost minus accumulated depreciation. Under the written-down value method, this value decreases each year as depreciation is applied to it. The depreciation rate is then applied to this declining net book value, creating progressively smaller depreciation charges that reflect the asset's diminishing productivity and market worth.