Ad-Free CAclubindia and Daily Updates on your mobile. Subscribe Now!

Help-depreciation

Shubham kumar (.) (620 Points)

14 September 2012

In WDV method Of depreciation, why We don't Subtract Salvage value from original Cost of asset?

Reply
Follow
Share

2 Replies

Sanjay S (Chartered Accountant) (1375 Points)
Replied 23 September 2012

Wow, actually i think thats a very good question.. i'm not so sure about the exact answer..

But I can give you the difference of logic b/w the two methods.

SLM method of depreciation: In this method, a little something called the salvage value comes into play. This is supposed to be the value you will realize when you sell the asset after some years of use [called Life of the asset]. So this salvage value is a thing that will reduce your cost.

I'll give you an example: Suppose you have an asset worth Rs.10,000. You are planning on putting the asset to use for a whole 5 years before you sell it and you expect a minimum of Rs. 1000 on the final scrap sale. So this Rs 1000 is your salvage value.. I mean the asset actually cost you 10000 but effectively you have spent only Rs. 9000 ( since you are going to get back Rs.1000 when you sell it) and this becomes the cost of the asset. Hence this Rs9000 is the cost that is apportioned over the life of the asset [called SLM Depreciation]. So depreciation is Rs.9000/5 = 1800.

One thing quite noticeable about this method is that the book value of the asset is reduced to 'zero'.

But in WDV method, a fixed rate is used to depreciate the asset and here the depreciation happens to be higher in the first few years of use and then decreases towards the end of its life. Unlike SLM , in this method one does not reduce salvage value from the cost mostly because the book value of the asset never gets to zero. Infact the book value gets reduce to the salvage value in the end ( and not Zero).

This is how I have understood this concept ..

Hope i have helped...