Depreciation of fixed assets is inevitable and important. This calculation is done either through the written down value method of depreciation or through the straight-line method. Calculating depreciation is a practice while doing financial accounting of assets which are purchased for their long-term benefit. This depreciation on the property is nothing but the ‘loss of value’ due to the wear and tear of the property on the original cost of the particular property.
Furthermore, calculating the written down value of the property, all the things that can be considered as buildings need to be considered. These include driveways, fencing of the property, compound wall, any road created inside the property, storage unit, and any hoarding structure erected.
Also, depreciation cannot be calculated on the assessment of land expenditure and any premium on leasehold land.

What is the written down value of the property?

For the uninitiated, the depreciated value of the property is the written down value of the property. This written down value of the property is the value or worth of the property in financial terms after deducting the depreciation. The written down value can also be called the present worth of the property or asset.

How to calculate depreciation on a property?

Depreciation is the loss or reduction in the value of the property. It can also be referred to as the written down value of the property. This loss of property happens due to functional issues, physical issues, and regional or locational issues with the property. The calculation for the depreciation value or the written down value of the property is done by different methods.
The two primary methods of calculating depreciation are Straight-Line and the Written Down Value Method. In the following sections, information related to the written down value method of depreciation has been discussed in detail.

What does the written down value method of depreciation mean?

The written down value method of depreciation is calculated by subtracting the amount of standard depreciation from the book value (the original value of the property) of the property. In addition, the written down value method of depreciation is also known as the method of reducing balance. Wherein, the book value of the property keeps on changing every year under the written down value method of depreciation.

To quote an example:

The book value of the property is 70,00,000 Rupees in the year 2019

Assuming that the rate at which depreciation is to be charged under the written down value method of depreciation is 10%

Then the amount of depreciation in the first year will be 70,00,000 x 10/100 = 7,00,000 Rupees.

Based on this the present value of property based written down value method of depreciation in the year 2020 will be 70,00,000 - 7,00,000 = 63,00,000 Rupees.

Similarly, for the year 2021, the standard rate of depreciation on property that is 10% will be calculated at 63,00,000 Rupees.

Therefore the amount of depreciation as per written down value method of depreciation will be 63,00,000 x 10 / 100 = 6,30,000 Rupees.

The value of property in 2021 based on the written down value method of depreciation will be 63,00,000 - 6,30,000 = 56,70,000 Rupees.

What is the exact written down value method of the depreciation formula?

The written down value method of depreciation formula used for calculation of depreciation is as follows:

Depreciation of the property can be calculated:
Number of years of property in use / Total age of the building

Therefore assuming that someone decides to make a sale of the property after 30 years.
Also, assuming that the total age of the property is 60 years.

Therefore the remaining functional age of the building is 30/60 = 1/2

Therefore to calculate the depreciation, one can deduct 1/2 from the price of the property.

Further, to get the property price = 1/2 x Market price should be done.

Lastly, in case someone wants to know the total or actual price of the property - add the market value of the land on which the property is constructed to the property price as calculated above.

Why use the written down value method of depreciation?

The depreciation on the property is calculated both for Income Tax Act and the Companies Act. The Companies Act does not restrict the use of any specific method of depreciation calculation. However, the Income Tax Act directs that calculation of property depreciation must be done using the written down method of depreciation.

It is often highlighted at the time of financial accounting that any long term asset that is purchased offers more value to the business during the initial years as compared to later years. Therefore, it is considered the best way to calculate the present value of the property or assets in a business.

However, this case of depreciation is not applied in the case of land purchased by the company. Because the land prices are known to appreciate over a period of time rather than depreciate.

Advantages of using written down value method of depreciation

It is often asked why calculating depreciation on the property is important. Calculating depreciation with the written down value method of the depreciation formula is beneficial as it gives the exact value of the property.

Following are some of the benefits of using the written down value method of depreciation:

  1. Beneficial while calculating income tax: To save tax, the calculation of depreciation is helpful for the property based on the written down value method.

  2. Helps in knowing the actual profit: The depreciation of the property is the component of the profit and loss statement of the company. As per the calculation of profit and loss affects the balance sheet of the company as well. If a proper recording of depreciation is not done, it can lead to an incorrect recording of numbers both in the profit and loss statement and the balance sheet. Also, calculating the depreciation based on the written down value method is much more accurate than other methods.

Assets and the standard rate of depreciation applicable

The following table highlights the different assets and the standard rates of depreciation that are used for calculating their written down value, especially under the written down value method of depreciation.

Assets

Rate of Depreciation

Residential use building

5%

Non-residential use building

10%

Furniture

10%

Plant and machinery

15%

Electronics, computers, and software

40%

Automotive for commercial use

30%

Automotive for personal use

15%

Intangible assets

25%

What Causes Depreciation of Property?

To understand what causes depreciation in property, let us first understand what determines the cost of the property and the subsequent written down value of the property. Components that determine the value of the property include the location of the property, amenities offered in the area where the property is located, environmental factors such as pollution and water shortage, and the overall infrastructure, among other things.

The components that are written above not only determine the cost of the property but also help in determining the depreciation of the property. Following are some of the aspects that lead to depreciation or written down value of the property:

Location of the property

The location of the property is a significant factor in determining the written down value of the property. The location of the property includes the entire neighbourhood, the distance of the property from nearby schools, hospitals, and the entertainment zone. If the property is present in an area that has all these facilities nearby, then the demand for that property might be more.

However, at the same time, if it is located in an area that does not have these facilities or has a dearth of civic amenities, then the value of the property will depreciate or can be written down over the years.

Condition of the property

When we talk about the condition of the house, it refers to the strength of the structure, integrity of the foundation of the property, wiring and plumbing state, and other fixtures and fittings used. In several cases, it has been seen that the newer the property, the lesser will be the written down value. Also, another aspect that can be a part of this depreciation is the obsolescence factor of the property.

The addition of new products in the market makes the existing ones obsolete. For example, the launch of unique designs and types of fixtures has made the existing ones obsolete over the years. Also, sometimes the taste and preferences of the consumers also change, which again leads to the obsolescence of the items.

Availability of land in the area

Another factor that causes depreciation of the property is the availability of land in the area. If there is enough land available for construction, then the valuation of the existing property is likely to come down in the future due to the wear and tear of the existing one and also due to the development of new properties in the area.

Economic conditions

The economic conditions can also lead to the depreciation of the property. These economic factors include too many vacant properties in the area, a change in the zoning plan, and an increase in the financial burden of people due to unforeseen pandemics such as covid-19.

Lastly, the calculation of depreciation for the property can be done in different ways. This helps in getting the exact written down value of the property. In other words, it helps in calculating the valuation of the property. Furthermore, the written down value method of depreciation helps in calculating the economic, physical, and functional depreciation of the property.