The original cost of the asset is Rs. 2,00,000 and depreciation is charged at 10% per annum at written down value. What is the written value of the asset at the end of third year.

Depreciation (1st year) = Rs.200,000*(10/100) = Rs.20,000 Written Down Value = Rs.200,000 - Rs.20,000 = Rs.180,000 Depreciation (2nd year) = Rs.180,000*(10/100) = Rs.18,000 Written Down Value = Rs.180,000 - Rs.18,000 = Rs.162,000 Depreciation (3rd year) = Rs.162,000*(10/100) = Rs.16,200 Written Down Value = Rs.162,000 - Rs.16,200 = Rs.145,800 Written Down means whatever is the reduced value of the asset. In the straight line method we have to calculate on the initial value of the asset. As evident from the example, the amount of depreciation goes on reducing year after year. For this reason, it is also known ‘reducing installment’ or ‘diminishing value’ method. This method is based upon the assumption that the benefit accruing to business from assets keeps on diminishing as the asset becomes old. This is due to the reason that a predetermined percentage is applied to a gradually shrinking balance on the  asset account every year. Thus, large amount is recovered depreciation charge in the earlier years than in later years.