Which depreciation method is approved by income tax?

Under the Income Tax Act, depreciation is charged against income. There are varying techniques of assessing it, such as straight-line method or written down value method (WDV). The Act recognizes WDV method of depreciating asset, except for establishments involved in generation and/or distribution of power.

What is written down value method?

Written-down value is a method used to determine a previously purchased asset’s current worth and is calculated by subtracting accumulated depreciation or amortization from the asset’s original value. The resulting figure will appear on the company’s balance sheet.

Why is straight line method used?

Straight line is the most straightforward and easiest method for calculating depreciation. It is most useful when an asset’s value decreases steadily over time at around the same rate.

Why it is mandatory to claim depreciation in income tax?

The concept of depreciation is used for the purpose of writing off the cost of an asset over its useful life. Depreciation is a mandatory deduction in the profit and loss statements of an entity and the Act allows deduction either in Straight-Line method or Written Down Value (WDV) method.

What are the advantages of written down value method of depreciation?

Advantages of the written down value method of depreciation:

• This method is simple to understand and easy to operate.
• The amount of annual depreciation reduces with the reducing balance of the asset.
• The amount of depreciation is higher in the earlier years when the machine is efficient and the cost of repairs is low.

What is the written down value method of depreciation?

What is the Written Down Value Method? Written Down Value method is a depreciation technique that applies a constant rate of depreciation to the net book value of assets each year, thereby recognizing more depreciation expenses in the early years of the life of the asset and less depreciation in the later years of the life of the asset.

What is the difference between WDV and written down value?

Under the Written Down Value method, depreciation is charged on the book value (cost –depreciation) of the asset every year. Under the WDV method, book value keeps on reducing so, annual depreciation also keeps on decreasing. This method is also known as ‘Diminishing Balance Method’ or ‘Reducing Instalment Method’.

What is the difference between original cost and written down value?

The amount of annual depreciation is computed on Original Cost and it remains fixed from year to year. This method is also known as the ‘Original Cost method’ or ‘Fixed Instalment method’. Under the Written Down Value method, depreciation is charged on the book value (cost –depreciation) of the asset every year.

How do you calculate depdepreciation?

Depreciation is calculated on the book value of fixed assets. The amount of annual depreciation is fixed for all years of useful life. The amount of depreciation declines year after year. The Straight Line Method is not recognised by the Income Tax Department.