An example of Written Down Value (WDV) is when a piece of machinery, initially purchased for Rs. 10,000, depreciates by 10% annually. In this scenario, its WDV after one year would be Rs. 9,000.
Written Down Value (WDV) is the current value of an asset after accounting for depreciation. It reflects the asset's worth on a company's balance sheet at a specific point in time, having reduced its original cost by the accumulated depreciation.
Understanding the WDV Example
Let's break down the calculation for the machinery example:- Initial Cost of Asset: The machinery was originally bought for Rs. 10,000.
- Annual Depreciation Rate: The asset depreciates at a rate of 10% per year.
- Depreciation for the First Year: 10% of Rs. 10,000 equals Rs. 1,000.
- Calculating WDV: To find the WDV after one year, you subtract the depreciation for that year from the initial cost.
Here's how the calculation flows:
| Description | Amount (Rs.) |
|---|---|
| Original Cost of Machinery | 10,000 |
| Less: Depreciation for Year 1 (10%) | 1,000 |
| Written Down Value (WDV) after 1 Year | 9,000 |
This Rs. 9,000 represents the asset's net book value at the end of the first year. For subsequent years, depreciation would be calculated on the new WDV (Rs. 9,000), not the original cost, if using the WDV method of depreciation.
Why WDV Matters in Business
The Written Down Value is a crucial concept in accounting and finance for several reasons:- Accurate Asset Valuation: It provides a realistic valuation of an asset on the company's balance sheet, reflecting its diminishing utility over time.
- Tax Implications: Depreciation, based on WDV, is a deductible expense that reduces a company's taxable income, thus lowering its tax liability.
- Financial Reporting: WDV helps present a true and fair view of a company's financial position by showing the real value of its assets.
- Decision Making: It influences decisions regarding asset replacement, disposal, and insurance coverage. When an asset is sold, any capital gain or loss is typically calculated by comparing the sale price to its WDV.
- Capital Gains/Losses: For tax purposes, when an asset is sold, the gain or loss is determined by comparing the sale price to its WDV.
By understanding the WDV, businesses can better manage their assets, plan for future investments, and comply with accounting standards.
