Definition
Written-Down Value, also known as the book value or net book value, refers to the value of an asset after accounting for depreciation or amortization. It is calculated by subtracting the accumulated depreciation/amortization from the original cost of the asset. This value represents the estimated worth of the asset at a specific point in time, given its use, wear and tear, obsolescence, or any potential damage.
Phonetic
The phonetics of the keyword “Written-Down Value” is: /ˈrɪtn daʊn ˈvæljuː/.
Key Takeaways
1. Written-Down Value (WDV) – This is an accounting term that represents the reduced monetary value of an asset after accounting for depreciation or amortization.
2. Depreciation and Amortization – Over time, assets such as machinery, equipment, vehicles, etc., lose value due to use, wear and tear, or obsolescence. This loss in value is accounted for as depreciation for tangible assets and amortization for intangible assets. The WDV method is a way to calculate this reduction in value over time.
3. WDV Method – In the WDV method, depreciation is charged on the remaining life of an asset rather than its original cost. This results in a larger depreciation expense in the earlier years of an asset, with reducing annual charges as the asset ages.
Importance
The Written-Down Value (WDV) is a critical term in business and finance as it provides an accurate reflection of an asset’s current market value after factoring in depreciation. Depreciation is the decrease in an asset’s value over time due to factors like use, wear and tear, or obsolescence. Businesses use the WDV to calculate the exact amount of depreciation to deduct from an asset each financial year, which in turn affects the company’s net profits and taxable income. Understanding the WDV of an asset helps businesses make informed decisions regarding asset management, investment, and future financial planning. Therefore, WDV is an essential aspect of maintaining a comprehensive and accurate financial overview of a company’s assets.
Explanation
The primary purpose of the Written-Down Value (WDV) in finance and business is to represent the depreciated value of an asset over time. This calculation shows the remaining book value of an asset after factoring in depreciation costs, which naturally occur as the asset ages and loses some of its initial value. Depreciation is an important concept in business as it measures the decline in value of long-term assets, and the WDV provides an accurate depiction of their current worth in realistic terms. This helps businesses more accurately assess their standing in terms of asset value, which aids in effective financial planning and decision making. In practical terms, Written-Down Value not only determines the depreciation amount for each accounting period but also computes the tax liability of a business as depreciation is a deductible expense. If an asset is sold, the WDV helps determine any gain or loss by comparing the selling price with the WDV. Therefore, from an accounting perspective, the concept of WDV is significant for evaluating the true economic worth of an asset, facilitating budgeting, tax planning, asset disposal decisions, and maintaining accurate financial records.
Examples
1. Real Estate Depreciation: A commercial property owner purchased a building for $500,000. According to IRS guidelines, commercial properties have a useful life of 39 years. Therefore, the owner can claim depreciation of approximately $12,820 each year. After 10 years, the written-down value of this property would be calculated by subtracting the total depreciation of $128,200 (10 years x $12,820/year) from the original cost. The written-down value of the property in the company’s books would then be $371,800 ($500,000 – $128,200).2. Machinery/Equipment Depreciation: Suppose a manufacturing company purchased a machine for $200,000. The machine has a life expectancy of 10 years, and the estimated salvage value at the end of its life is $20,000. Using the straight-line method of depreciation, the business would depreciate the machine at $18,000 per year. After 5 years, the written-down value of this machine would be $110,000 ($200,000 – $90,000).3. Vehicle Depreciation: A delivery company bought a fleet of vans for $100,000. The expected useful life of these vans is 5 years with no salvage value. Using the straight-line method of depreciation, each year, $20,000 will be written off as depreciation. If calculating after 3 years, the written-down value of the vans would be $40,000 ($100,000 – $60,000). This represents the value of the vans on the company’s books after accounting for wear and tear.
Frequently Asked Questions(FAQ)
What is Written-Down Value (WDV)?
Written-Down Value (WDV) is the depreciated value of an asset after accounting for depreciation over the years. It’s calculated by subtracting accumulated depreciation from the original cost of the asset.
How is Written-Down Value calculated?
The calculation of Written-Down Value is quite simple. It is the original cost of the asset minus the accumulated depreciation of the asset over the years it has been in use.
Why is Written-Down Value important?
The Written-Down Value of an asset is important particularly for businesses because it helps in determining the current value of the asset, the financial position of the company, the depreciation charge for a specific period, and for tax purposes and insurance claims.
How often is the Written-Down Value calculated?
Typically, the Written-Down Value is calculated at the end of each financial year, this aids companies in reflecting the most accurate value of the assets in their financial statements.
Does the Written-Down Value ever increase?
No, the Written-Down Value does not increase. It will always decrease as long as the asset is being used because depreciation will always accumulate unless the asset has been fully depreciated or disposed of.
Can Written-Down Value be negative?
No, the Written-Down Value cannot be negative. The minimum Written-Down Value of an asset can be zero, which means that the asset is fully depreciated.
What assets are eligible for Written-Down Value?
Any depreciable asset is eligible for Written-Down Value. This includes machinery, equipment, vehicles, furniture, and buildings, among others. Non-depreciable assets such as land do not have a Written-Down Value.
Related Finance Terms
- Depreciation: In business finance, it is the reduction in the value of an asset over time due to wear and tear, age, or obsolescence.
- Asset Valuation: The process of determining the fair market or present value of assets, using book value, absolute valuation models, or comparable pricing methods.
- Book Value: The value of an asset according to its balance sheet account balance.
- Residual Value: The estimated value of an asset at the end of its useful life.
- Amortization: This is the process of gradually writing off the initial cost of an asset over a period of time.
