Question

Differentiate between the straight line method and the written-down value method.

Answer 1

Basis of Difference	Straight Line Method	Written-Down Value Method
Basis for calculation	Depreciation is calculated on the original cost of an asset.	Depreciation is calculated on the reducing balance, i.e., the book value of an asset.
Amount of depreciation	An equal amount is charged each year over the asset's effective life.	A diminishing amount of depreciation (on the written-down value of the asset) is charged each year over the asset's effective life.
Book value of an asset	The asset's book value becomes zero at the end of its effective life.	The book value of the asset can never be zero.
Suitability	It is suitable for assets like patents, copyrights, land and buildings, etc., which have a lesser possibility of obsolescence and lesser repair charges.	It is suitable for assets that need more repair in the later years, like plant and machinery, cars, etc.
Effect of depreciation and repair on profit and Loss Account	Unequal effect over the asset's life, as depreciation remains the same over the years, but repair cost increases later.	Equal effect over the asset's life, as depreciation costs are high and repairs are less in the initial years. However, in the latter years, the repair costs increase and depreciation costs decrease.
Recognition under the Income Tax Act	It is not recognised under the Income Tax Act.	It is recognised under the Income Tax Act.