Comparative Analysis of Straight line and Written down Value Method Video Lecture | Accountancy Class 11 - Commerce

let us make a comparison of depreciation
repairs and cost offs and therefore the
total cost of machine usage we will
compare the fixed installment or the
stress select straight-line method and
the written down value method under the
fixed installment of the straight-line
method we said depreciation is the same
but under the written down value method
the depreciation reduces because how is
depreciation computed under the written
down value it is a fixed rate on the
written down value it is a fixed rate on
a reducing balance since the written
down value of the asset goes on reducing
repairs may increase we are considering
the same scenario so it could increase
whether we follow the fixed installment
or the written down value method of
depreciation therefore what happens if
the depreciation is the same and the
repairs increases in the straight-line
method the total charge to the profit
and loss will increase however under the
written down value method depreciation
decreases repairs increase so that the
total charge to profit and loss may not
increase too much we can also consider
an example suppose we take this asset of
4,000 with an estimated life of two
years and arrest residual value of 1000
in that case as we computed earlier
under written down value method the rate
of depreciation was 50% under the
straight-line method however the
depreciation would be 4000 minus 1000
that is cost minus crap divided by a
life of two giving us 1500 would be the
amount of depreciation each under
written down value method we had
computed that it would be 2000
and 1000 therefore and a fixed
installment depreciation in the first
year is 1,500 it is fixed in the second
year also it is 1500 under the written
down value method depreciation is 2000
and the second year it is 1000 let us
assume that there were no repairs in the
first year
however the repairs in the second year
was 1040 in case of portal of
depreciation and repairs in the first
year it is 1500 under the fixed
installment method but 2500 in the
second year therefore the total cost of
machine usage that is including
depreciation including repairs we get we
see that the total cost of using of the
machine has changed from 1500 in the
first year to 2500 in the next which is
a large jump but under the written down
value method we have the total charge to
profit and loss of 2,000 in the first
year and in the second year again 2000
therefore the total of the repairs and
depreciation or in other words the total
cost of machine usage can be more or
less kept at a uniform level that is why
the written down value method is
preferred in case of those assets which
require a lot of repairs as the asset
grows older the straight-line method is
preferred in those instances where there
are hardly any repairs and maintenance
expenses a comparison straight line
versus reducing balance method under the
straight-line method depreciation
charged each year is equal equal
but another reducing balance
depreciation reduces each as we
mentioned before this is because it is a
fixed rate or not reducing balance
thoth however under the straight-line
method the total of the depreciation and
repairs may increase as the asset gets
older if that is if repairs get higher
as an asset grows older then the total
of the depreciation and repairs would
increase as the asset gets older
under the straight-line method however
under the reducing balance method since
the amount of depreciation goes down
while the amount of repairs goes up it
is quite likely that the variation on
the total of repairs and depreciation
may not very much may be more or less
uniform the under the straight-line
method the value of an asset could be
reduced to zero or it is reduced to the
scrap value under the reducing balance
method the value of an asset cannot be
esteem extinguished even if it has no
scrap value there will always be some
balance remaining in the asset the rate
of depreciation on the straight-line
method was nothing but depreciation per
annum divided by cost in 200 since the
depreciation per annum is fixed it's the
same amount each year but under the
reducing balance method the depreciation
rate is 1 minus the nth root of residual
value by cost of asset in 200 the
straight-line method is suitable for
assets which have lower repairs and
maintenance for example leases and
copyrights which do not have any repairs
expended
so it is fair to charge equal amount of
appreciation each year there is no other
cost of the use of the asset
however the reducing balance are written
down banking method is more suitable for
plant and machinery which have higher
repairs and maintenance as the machine
gets older so that the total cost of
using the machine that is a repairs plus
depreciation may more or less remain
uniform hereafter here this in brief is
a comparison between the straight line
and reducing balance methods of
computing depreciation two very popular
methods of computing depreciation