Depreciation, Provisions and Reserves

For example, the original cost of a truck is Rs. , , and its net salvage value after years of useful life is Rs. , then the appropriate rate of depreciation will be computed as under: . % .

) ( , , , R × − ×         − . . . Advantages of Written Down Value Method Written down value method has the following advantages: This method is based on a more realistic assumption that the benefits from asset go on diminishing (reducing) with the passage of time.

Hence, it calls for proper allocation of cost because higher depreciation is charged in earlier years when asset’s utility is higher as compared to later years when it becomes less effective. It results into almost equal burden of depreciation and repair expenses taken together every year on profit and loss account; Income Tax Act accept this method for tax purposes; As a large portion of cost is written-off in earlier years, loss due to obsolescence gets reduced; This method is suitable for fixed assets which last for long and which require increased repair and maintenance expenses with passage of time. It can also be used where obsolescence rate is high. .

. . Limitations of Written Down Value Method