Depreciation, Provisions and Reserves

Although this method is based upon a more realistic assumption it suffers from the following limitations. As depreciation is calculated at fixed percentage of written down value, depreciable cost of the asset cannot be fully written-off. The value of the asset can never be zero; It is difficult to ascertain a suitable rate of depreciation. .

Straight Line Method and Written Down Method: A Comparative Analysis Straight line and written down value methods are generally used for calculating depreciation amount in practice. Following are the points of differences between these two methods. In straight line method, depreciation is charged on the basis of original cost or (historical cost). Whereas in written down value method, the basis of charging depreciation is net book value (i.e., original cost less depreciation till date) of the asset, in the beginning of the year.

The annual amount of depreciation charged every year remains fixed or constant under straight line method. Whereas in written down value method the annual amount of depreciation is highest in the first year and subsequently declines in later years. The reason for this difference, is the difference in the basis of charging depreciation under both methods. Under straight line method