The difference between SLM and WDV refers to two common methods of calculating depreciation: the Straight Line Method (SLM) and the Written Down Value (WDV) method. Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. Businesses use depreciation to account for the gradual loss of value in the assets, thereby aiding in determining the accurate performance and position of the business. Understanding the difference between SLM and WDV is very important when choosing the right depreciation method to apply according to the type of assets or financial objectives.
There are two methods of calculating depreciation. These are the straight-line method and written down value. Although each of these methods distributes the cost incurred on an asset over time, it is done differently.
In the SLM, the depreciation amount is presumed to be uniform per annum from the date of inception of the asset till the date of its useful life. This method assumes that the asset depreciates its value uniformly over the years. Such a method is very simple and gets very often used especially on assets that give constant and consistent benefits with time, such as buildings or furniture.
Formula for SLM:
The WDV method calculates depreciation as a percentage of the asset’s book value at the beginning of every year. Here it is assumed that an asset depreciates more in the initial years of its life and less as time passes on. It is best suited for machinery or equipment that undergoes tremendous wear and tear in the initial years.
Formula for WDV:
The key difference between SLM and WDV lies in how depreciation is calculated and applied over time. While SLM charges a constant depreciation amount, WDV results in decreasing depreciation amounts over the asset’s life.
There are several methods of calculating depreciation, each serving different purposes and reflecting how an asset’s value declines over time. The two main methods used are:
This method allocates an equal amount of depreciation each year. It is simple to calculate and best suited for assets that provide uniform utility throughout their useful life.
Example:
If an asset costs $10,000, has a useful life of 5 years, and a residual value of $1,000, the annual depreciation will be:
The WDV method applies a fixed percentage of depreciation on the asset’s book value at the start of each year. This method results in higher depreciation in the early years and lower depreciation in later years.
Example:
If an asset costs $10,000, and the depreciation rate is 20%, the depreciation for the first year will be:
In the second year, the book value is now $8,000, so depreciation will be:
Both methods aim to allocate the cost of the asset over its useful life, but the **method of calculation** differs based on the assumptions about how the asset loses value over time.
The Straight Line Method (SLM) is often chosen for its simplicity and consistency in depreciation allocation. Some of the key advantages of the Straight Line Method include:
The Written Down Value (WDV) Method is favored for assets that experience higher wear and tear in their early years. Some key advantages of the Written Down Method include:
The decision on the best method of depreciation to be used is based on the type of asset, pattern of revenue generation, and financial goals of the business. Each has its merits, but the correct method will depend upon the kind of business specified.
SLM is best used on assets that provide constant value and utility in the long term. It is particularly effective for long-duration assets like buildings, furniture, and intangible assets. It provides a smoothed expense on the amortized depreciation, thus providing manageability and predictability of performance.
WDV is optimum for assets that depreciate early in their lives, like machinery or equipment or vehicles. It provides maximum tax advantage during the initial years of an asset’s usage and can also be used if a firm wants to make savings on taxes while also deploying those capital amounts back into the business.
Most businesses use WDV for assets with high initial periods of utilization, and SLM for assets utilized over longer periods. Such a choice is based on how the company would want to earn revenue and how it would like to control its reporting and taxation of transactions.
In conclusion, it follows that the distinction between SLM and WDV is in the method through which depreciation is computed and also an assumption about how assets depreciate over time. This means that the Straight Line Method deals with equal yearly provisions of depreciation which makes it very appropriate for assets of constant value. On the other hand, the Written Down Value Method attracts a higher depreciation rate in the early years. It may apply to those assets that exhibit rapid productivity or value decline in their early years. The application of these methods would instead depend on which type of asset is concerned, whether tax considerations or what financial policy to follow in running the business enterprise.
The main difference is, that SLM will charge a constant amount as depreciation every year, while WDV charges high depreciation initially and then tapers off.
The WDV method is more tax-favorable since it expels more depreciation during the early years that greatly reduce taxable income in those periods.
Yes. A company can apply the two methods on different assets. It depends on the nature and use of the asset.
Cost of the asset minus residual value divided by the useful life is the SLM method for calculation of depreciation.
No, WDV is better suited for those assets which incur quick wear and tear in the early years, such as machinery and vehicles.
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