Depreciation Methods: Straight Line vs Written Down Value

Buy a delivery van for your business at ₹10 lakh and you have not spent ₹10 lakh this year — you have bought several years of use. Accounting spreads that cost across those years, and the tool it uses is depreciation. But how you spread it is a choice, and that choice quietly changes your reported profit and your tax bill. This is where depreciation methods come in. The two that matter in India are the Straight Line Method (SLM) and the Written Down Value (WDV) method, and picking between them is not just an exam question — it is a decision every business owner, accountant and ACCA student has to get right.

This guide breaks both methods down with plain worked examples, shows exactly how each one bends your book value and profit, and explains what the Companies Act 2013 and the Income Tax Act actually let you do.

What Depreciation Really Means (and Why the Method Matters)

Depreciation is the accounting process of allocating the cost of a tangible fixed asset — machinery, vehicles, furniture, buildings, computers — over the years it is expected to be useful. It is not about the asset’s market price on any given day. It is about matching the cost of an asset to the periods that benefit from it, which is the same matching principle that underpins all of accrual accounting.

Every depreciation calculation needs three inputs: the cost of the asset, its estimated useful life, and its residual (salvage) value — what you expect it to be worth at the end. The depreciation method is simply the rule for how you split the depreciable amount (cost minus residual value) across those years.

Why does the choice matter so much? Because the two dominant methods produce very different year-by-year numbers from the same asset. One writes off an equal slice every year; the other writes off more early and less later. That difference flows straight into your profit and loss statement and, through it, into the tax you pay. If you are building this foundation properly rather than piecing it together from scattered videos, a structured accounting fundamentals course turns these concepts from confusing to obvious in weeks.

It also matters because depreciation is a non-cash expense. No money leaves your bank account when you record it — you already paid for the asset up front — yet it reduces your reported profit, and therefore your tax. That makes depreciation one of the few levers where the accounting method itself, not any actual spending, changes how much a business owes. Understanding the two methods is really about understanding how that lever works and where the law lets you pull it.

The Straight Line Method (SLM): Spreading Cost Evenly

The Straight Line Method is the simplest of the depreciation methods. It charges the same amount of depreciation every year across the asset’s useful life. The formula is refreshingly clean:

Take a machine costing ₹1,00,000 with a five-year life and negligible residual value. Under SLM you charge ₹20,000 to the profit and loss account every single year, for five years, until the book value reaches zero. Nothing changes from one year to the next.

This predictability is exactly why finance teams like SLM for assets that wear out evenly — buildings, furniture, office fit-outs. It makes budgeting simple and comparison across years honest. The trade-off is that it ignores a real-world truth: many assets lose most of their value early, and their repair costs rise later. SLM keeps the depreciation flat while maintenance climbs, so the total cost of owning the asset looks lighter in the early years than it really is.

There is also a reporting angle. Because SLM keeps early profits higher, businesses that want to present steady, comparable earnings — and companies whose assets genuinely age at a uniform pace — tend to prefer it in their financial statements. A landlord depreciating a building, or a firm depreciating its office interiors, gains little from front-loading the expense, so the simplicity of SLM wins.

The Written Down Value (WDV) Method: Front-Loading the Expense

The Written Down Value method — also called the diminishing balance or reducing balance method — takes the opposite view. It applies a fixed percentage to the asset’s reducing book value each year. Because the base shrinks annually, the rupee amount of depreciation is high in year one and gets smaller every year after.

Using the same ₹1,00,000 machine at a 20% rate: year one depreciation is ₹20,000 (20% of ₹1,00,000). Year two is ₹16,000 (20% of the remaining ₹80,000). Year three is ₹12,800, and so on. The charge tapers, and the book value never quite touches zero — it just keeps halving toward it. The rate itself can be derived from the formula WDV rate = 1 − (Residual ÷ Cost) raised to the power of one over the useful life.

WDV mirrors how vehicles, computers and machinery actually behave: they lose value fastest when new. It also front-loads the tax benefit, because a bigger expense early means lower taxable profit early. That is precisely why, as you will see below, the Income Tax Act insists on this method.

SLM vs WDV: A Side-by-Side Comparison

The two methods are not "better" or "worse" — they answer different questions. SLM asks, "How do I spread this cost fairly and simply?" WDV asks, "How do I match the expense to how fast the asset actually loses value?" Here is how they line up on the criteria that matter.

The clearest way to feel the difference is the total maintenance-plus-depreciation cost. Under WDV, high depreciation early and low repairs early roughly balance the low depreciation and high repairs later, so the total annual cost of the asset stays more even — which many accountants argue is the more realistic picture.

The Rules: Companies Act 2013 vs Income Tax Act

Here is the part that trips people up: in India you often apply both methods to the same asset — one set of books for company reporting, another calculation for tax. They follow different rulebooks.

Companies Act 2013, Schedule II

For financial statements, the Companies Act 2013 moved away from prescribing fixed rates. Schedule II now gives an indicative useful life for each asset class and lets the company depreciate over that life using either SLM or WDV. It also caps residual value at 5% of the original cost unless the company can justify otherwise. This useful-life approach replaced the old rate-based Schedule XIV.

Income Tax Act

For computing taxable income, the Income Tax Act does not give you a choice: depreciation is calculated using the WDV method on a "block of assets". A block groups all assets of the same class and rate together, so individual assets lose their identity — you depreciate the whole pool. Each block has a prescribed rate, and a special 180-day rule applies: an asset used for less than 180 days in the year you buy it gets only half the normal rate that year.

Notice the logic: computers depreciate at 40% because they genuinely become obsolete fast, while a residential building sits at 5% because it lasts decades. The tax code is using WDV to reflect real economic wear — and to give businesses a quicker write-off on assets that date quickly. We break down the wider tax and reporting context in our guide to accrual vs cash accounting.

How to Choose the Right Method (and Mistakes to Avoid)

For most Indian businesses the "choice" is partly made for you: tax computation must use WDV on blocks, so that calculation is non-negotiable. The real decision sits in your financial statements, where Schedule II lets you pick. Use this simple logic:

A few mistakes cost businesses and exam candidates the most marks:

• Forgetting residual value. SLM depreciates cost minus residual value, not the full cost. Miss it and every year’s figure is wrong.
• Applying WDV to original cost every year. The whole point of WDV is the reducing base — apply the rate to book value, never the original cost after year one.
• Ignoring the 180-day rule in tax computation. An asset bought in February and used under 180 days gets half depreciation that year.
• Mixing up the two rulebooks. Companies Act useful lives and Income Tax block rates are different systems; keep the two calculations separate.

Getting comfortable with both methods is a core skill in the double-entry bookkeeping that sits underneath every financial statement, and it shows up directly in professional papers — see how it fits the syllabus in our breakdown of the ACCA Financial Accounting (FA) paper.

Key Takeaways and Your Next Step

Depreciation methods are not accounting trivia — they decide how ₹10 lakh of asset cost lands on your books and your tax return. SLM spreads cost evenly and is simple; WDV front-loads the expense and mirrors how assets really lose value. In India, financial statements follow the Companies Act 2013’s useful-life approach (your choice of SLM or WDV), while tax follows the Income Tax Act’s mandatory WDV-on-blocks system. Master the two worked examples above and you can handle almost any depreciation question a business — or an exam — throws at you.

Frequently Asked Questions

What are the two main depreciation methods in India?

The two main depreciation methods are the Straight Line Method (SLM) and the Written Down Value (WDV) method. SLM charges an equal amount of depreciation every year, while WDV applies a fixed percentage to the asset’s reducing book value, so the charge is higher early and lower later. Indian companies use these under the Companies Act 2013 and the Income Tax Act.

Which depreciation method is used for income tax in India?

For income tax, only the Written Down Value (WDV) method is allowed, and it is applied on a "block of assets" — a pool of assets in the same class and rate. Prescribed rates include 40% for computers, 15% for plant and machinery, and 10% for furniture. An asset used for less than 180 days in its year of purchase gets half the normal rate.

What is the difference between SLM and WDV?

SLM depreciates the original cost evenly over the useful life, so the annual charge is constant and the book value can reach zero. WDV depreciates a reducing book value at a fixed rate, so the charge falls each year and the book value never fully reaches zero. SLM suits even-wear assets; WDV suits assets that lose value quickly, like vehicles and computers.

How does the Companies Act 2013 treat depreciation?

The Companies Act 2013, through Schedule II, uses a useful-life approach instead of fixed rates. It specifies indicative useful lives for asset classes and lets a company choose SLM or WDV to depreciate over that life. Residual value is generally capped at 5% of original cost. This replaced the older rate-based Schedule XIV.

Can a company use both SLM and WDV?

Yes — and many do. A company may use SLM or WDV in its financial statements under the Companies Act, while its tax computation must separately use the WDV block method under the Income Tax Act. It is common to maintain both calculations because the two frameworks serve different purposes: fair reporting versus taxable income.