Difference Between SLM and WDV Method of Depreciation

Key Difference – SLM vs WDV Method of Depreciation
 

Depreciation is an important accounting method used to allocate the cost of tangible assets over their economic life (the time period that the asset is expected to assist in generating income for the business). This should be done in order to comply with the Matching concept of accounting. (Revenues generated and expenses should be recognised for the same accounting period) There are a number of methods that a company can use to allocate depreciation expenses, and SLM  (straight line method) and WDV (written down value) method are the most widely used among these methods. The key difference between SLM and WDV method of depreciation is that SLM charges depreciation at an equal rate where WDV charges it at varying rates.

CONTENT
1. Overview and Key Difference
2. What is SLM Method of Depreciation
3. What is WDV Method of Depreciation
4. Side by Side Comparison – SLM vs WDV Method of Depreciation

What is SLM (Straight-Line Method) of Depreciation?

In this method, depreciation is charged in equal amounts where the purchase cost (less salvage value, which is the estimated resale value of the asset) is divided by the economic life of the asset. Economic life is the estimated time period in which the asset can be used in the business. This is the simplest and easiest way of charging depreciation, therefore it is less prone to erroneous calculations. This method is ideal for assets when there is no particular pattern to the way in which the asset is to be used over time.

E.g. Purchase cost= $ 100,000   Salvage value= $ 20,000   Economic life= 10 years

Depreciation amount= ($100,000 – $ 20,000 / 10) = $ 8,000

What is WDV (Written down value) Method?

Depreciation is charged at a higher rate in the earlier years of an asset, and the charge is gradually reduced as the asset wears off in this method. Each year the depreciation will be charged on the Net Book Value (value of the asset after charging depreciation) which reduces with each passing year. This is a relatively time consuming and difficult method of calculating depreciation. However, the underlying assumption here is that the asset has a high usage during the early years, thus should be charged more depreciation; which is correct for most assets.

E.g. Purchase cost= $ 100,000   Salvage value= $ 20,000   Economic life= 10 years

Change in the Method of Depreciation

Depreciation is an estimate. Thus the method companies use to account depreciation can be changed over time. A company using an SLM may decide to start using the WDV method from the next financial year. However, once a depreciation method is selected, that cannot be changed each year going back and forth with another method; the selected method is expected to be continued for a period of time. The guidelines for changes in accounting estimates are introduced through IAS 8- ‘Accounting policies, changes in accounting estimates and errors.’ If a depreciation method is changed, the carrying amount of the asset at the date of change will be depreciated on the basis of the new method.

Accumulated Depreciation

All the depreciation charges under both methods are credited to a separate account named ‘Accumulated depreciation account’. At the time of the sale of the asset, the accumulated depreciation is debited, and the asset account is credited.

What is the difference between SLM and WDV Method of Depreciation?

Reference

“How can we change the Depreciation method?” PakAccountants.com. N.p., 16 Mar. 2014. Web. 03 Feb. 2017.

“IAS Plus.” Disclosure initiative – Changes in accounting policies and estimates. N.p., n.d. Web. 03 Feb. 2017.

“Reducing Balance Depreciation Method.” Accounting Simplified. N.p., n.d. Web. 03 Feb. 2017. “What is the Reducing Balance Depreciation?” Debitoor.Com. N.p., n.d. Web. 03 Feb. 2017.

Image Courtesy: 

 “4 Depreciation methods” By Tosaka – Own work (CC BY-SA 3.0) via Commons Wikimedia

“18134” (Public Domain) via Pixabay