What it means
When a business buys an asset such as a machine, a vehicle or a computer, it records the cost and then spreads that cost over the years of use through depreciation. Each year, the depreciation is added to a running total called accumulated depreciation.
The written down value is the original cost less that total. The number is not the same as market value.
A machine with a written down value of $40,000 might sell for more or less, depending on demand and condition. It simply shows how much of the cost has not yet been charged to the income statement.
The written down value method, also called the reducing balance method, applies a fixed percentage to the opening written down value each year. Because the base falls every year, depreciation is highest in the first year and smaller later, which suits assets that lose value or usefulness quickly.
The straight line method, by contrast, charges the same amount each year. Written down value matters in several areas.
It is the starting figure for working out a gain or loss when an asset is sold, since the profit is the sale price less the written down value. Tax authorities often apply their own allowance rules, so the tax written down value can differ from the figure in the accounts.
The nuance is that the reducing balance method never takes the value to exactly zero unless a final adjustment is made. Companies normally estimate a residual value and stop depreciating when it is reached.
Estimates of rates and lives must be reviewed regularly so that the figures reflect reality. Software now does most of the calculations, but someone still has to set the rates and lives.
Finance teams keep a fixed asset register that lists the cost, date of purchase, rate and current written down value of every item. Checking the register against the physical assets each year catches items that have been sold, scrapped or lost.
In practice
Real-world examples.
Example
A courier company buys a van for $40,000 and uses the reducing balance method at 25%. After one year the written down value is 40,000 - 10,000 = $30,000, which appears on the balance sheet. The remaining value falls each year as depreciation continues.
Example
A printing firm sells a machine with a written down value of $18,000 for $21,000. The $3,000 difference is recorded as a gain on disposal in the income statement. The same comparison would show a loss if the sale price were below $18,000.
Example
A dental clinic buys equipment for $60,000. When preparing its tax return, the accountant compares the accounting written down value with the tax written down value to calculate the deferred tax adjustment. The gap between the two figures is a temporary difference that reverses over time.
Formula
Calculation
Written down value = cost - accumulated depreciation
Depreciation for the year = depreciation rate x opening written down value
Suppose a company buys a machine for $100,000 and depreciates it at 20% a year on the reducing balance. Year 1 depreciation = 0.20 x 100,000 = $20,000, so the written down value is 100,000 - 20,000 = $80,000. Year 2 depreciation = 0.20 x 80,000 = $16,000, giving a written down value of $64,000. Year 3 depreciation = 0.20 x 64,000 = $12,800, giving $51,200.Case study
Seen in the real world.
Fairhaven Bakery is an illustrative, fictional business that bought an industrial oven for $50,000. The owner expected it to lose value faster in early years and chose a 30% reducing balance rate.
After year one the depreciation was 0.30 x 50,000 = $15,000, leaving a written down value of $35,000. After year two the depreciation was 0.30 x 35,000 = $10,500, leaving $24,500. At the start of year three the owner received an offer of $30,000 for the oven.
The sale would produce a gain of 30,000 - 24,500 = $5,500, which the accountant recorded as income. The illustrative lesson is that the written down value is an accounting figure and not a market price, so a gain or loss on sale is normal.
Watch out
Common mistakes.
- Assuming the written down value equals the amount the asset could be sold for, when it is simply cost less depreciation.
- Applying the depreciation rate to the original cost every year, which is the straight line approach and not the reducing balance method.
- Forgetting to stop depreciation at the residual value, so the asset is written down below what it is expected to be worth.
Questions
People also ask.
Is written down value the same as net book value?
Yes, the terms are generally used interchangeably, along with carrying amount. The names vary between countries and textbooks, but the meaning is the same.
Why is depreciation higher in early years?
The reducing balance method applies the rate to a larger value at the start, so the charge falls as the value falls. This pattern suits assets such as vehicles and computers that lose most of their value early.
Is the accounting value the same as the tax value?
Not usually, because tax rules set their own allowances and rates, which can create timing differences.
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