Perpetual Depreciation Calculator uses Time Value of Money Concept to calculate depreciation under WDV method. Application of Time Value of Money Concept charges higher depreciation in initial years compared to Normal depreciation allocation.
Let’s understand with the help of example
Under the Normal method of WDV Calculation: In case of assets acquired during the year, depreciation for the first year, is allocated based on the number of days asset is used during the year. In the given example, an assets has been used for 6 months during 2018-19, hence depreciation comes: Rs. 10,00,000 * 60% * 6/12 = Rs.3,00,000
Issues under this method:
- First year depreciation is under booked/accounted, WDV carried forward is not appropriate for all remaining years.
- At the end of useful life of asset, WDV will not equate to residual value. (See in example Rs.64,000 is residual value, however as per chart it comes Rs. 78,400.
- Where there is quarterly reporting, WDV carried forward is not appropriate.
Under the time value of money concept, depreciation is calculated on daily reducing balance and allocation is done accordingly. This makes higher depreciation during initial days and lower depreciation in later days of the year. In the given example, depreciation for the first year is Rs.3,67,544.
This method addresses issues of Normal WDV method of depreciation allocation.
Depreciation under Time Value of Money concept is higher during initial years which means Book Profit of company during Initial years will reduces which can eventually save MAT tax liability (If applicable).