Distinguish between straight line method and written down value method of calculating depreciation.
Basis of Calculation: Under the Straight Line Method, depreciation is calculated based on the assumption of same utility of the asset in different accounting years. Under the Written Down Value Method (also known as reducing balance method), depreciation is charged on the book value of the asset at a fixed percentage, and the amount reduces year after year.
Effect on Profit and Loss: In Straight Line Method, the total charge against profit on account of depreciation and repair keeps increasing from year to year. In Written Down Value Method, it results in almost equal burden of depreciation and repair expenses taken together every year.
Other Points: The Income Tax Act accepts the Written Down Value Method. Under this method, the value of asset can never be zero and it reduces loss due to obsolescence as a large portion of cost is written-off in earlier years.
Explanation
The answer compares the two methods based on key parameters explicitly mentioned in the textbook context: basis of calculation, impact on profit/loss over time, tax acceptance, and treatment of asset value and obsolescence. The Straight Line Method assumes equal utility across years leading to increasing total charges, while WDV charges on reducing book value resulting in balanced annual burden.