3.7 : Calculating Depreciation: Written-down-value Method

The written-down value method, also known as the declining balance method,  is a method of depreciation that results in higher depreciation charges in the early years of an asset's life and lower depreciation charges in later years.

The method can be used for assets that lose their value quickly, like technological products.

Consider Paramount buys machinery for one hundred thousand dollars with an estimated useful life of five years, depreciating at twenty percent annually.

The first year's depreciation would be twenty thousand dollars.

In the second year, the depreciation would be twenty percent of the new book value, which amounts to sixteen thousand dollars. Third-year depreciation will further reduce to twelve thousand eight hundred dollars, and so on.

The method considers the machinery to be more productive initially than in later years.

This method helps the company compensate for expenses, with the reduced depreciation cost offset by the increasing repair cost of the machine.

The written-down value method records higher depreciation in the early years, making it beneficial for some companies in terms of improved financial planning and reporting.