Written Down Value Method for Depreciation

Depreciation is the reduction in the value of an asset over time due to wear and tear, obsolescence or other factors. Companies use different methods to calculate depreciation. One such method is the written down value method.

Explanation

The written down value method is a depreciation method that allows companies to depreciate their assets at a faster rate in the earlier years of an asset's useful life and at a slower rate in the later years. This method is also known as the reducing balance method.

Reason for using the Written Down Value Method

The reason why XYZ Ltd. uses the written down value method for depreciating machinery is due to consistency. Consistency is an accounting principle that requires companies to apply the same accounting methods and procedures from one period to the next. By using the written down value method consistently, XYZ Ltd. can ensure that their financial statements reflect an accurate representation of their assets' value.

Advantages of Written Down Value Method

- The written down value method reflects the actual usage of the asset over time.
- It allows companies to depreciate their assets at a faster rate in the earlier years of an asset's useful life and at a slower rate in the later years.
- The method is simple and easy to understand.
- It is a better reflection of the actual wear and tear of an asset.

Disadvantages of Written Down Value Method

- The method may not accurately reflect the actual value of an asset.
- It can result in a higher depreciation expense in the earlier years, which can affect the company's profits and taxes.
- The method assumes that the asset's value decreases at a constant rate, which may not always be the case.

Conclusion

In conclusion, the written down value method is a useful method for depreciating machinery year after year due to consistency. It allows companies to accurately reflect the value of their assets over time and ensures that their financial statements are consistent and accurate. However, companies should also consider the disadvantages of this method before deciding to use it.

Due to consistency concept which says accounting policies and practices once selected are followed every year