Writing-Down Allowance (WDA)§
Definition§
The Writing-Down Allowance (WDA) is a method used in accounting to enable businesses to deduct the depreciation on certain fixed assets from their taxable profits. This allowance acknowledges the gradual loss of value of assets such as machinery, equipment, and vehicles over time due to wear and tear, decay, or technical obsolescence. In the UK tax system, capital expenditure is not fully deductible in the year it is incurred, but WDA provides a way to spread this expense over several years.
Examples§
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Machinery and Equipment: A business purchases a piece of machinery for £50,000. Under the WDA, a specified percentage of this cost can be written down each year, reducing the business’s taxable profits by accounting for the depreciation.
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Commercial Vehicles: A company buys delivery trucks worth £100,000. Through the WDA, the company can write down a portion of the trucks’ value over multiple years, aligning with their useful life and reducing taxable income proportionately.
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Technical Equipment: A tech firm invests £25,000 in new computer systems. Using WDA, the company can spread the tax relief on this investment over several years, providing longer-term tax benefits.
Frequently Asked Questions (FAQs)§
Q1: How is the percentage for Writing-Down Allowance determined? A1: The percentage for WDA can vary based on the asset type and the country’s tax regulations. In the UK, for example, the standard annual rate for plant and machinery is often set at 18%, but there are special rates for certain types of assets.
Q2: Can WDA be claimed on all assets? A2: No, WDA typically applies to qualifying assets which include plant, machinery, and certain buildings. Some assets may have different depreciation rules or rates.
Q3: How does WDA affect the overall tax liability of a business? A3: By allowing businesses to write down the value of their assets, WDA reduces the taxable profits, leading to a lower overall tax liability over the period the assets are depreciated.
Q4: Is it mandatory to claim WDA each year? A4: No, claiming WDA is optional. Businesses can choose whether to claim it in any given year. However, not claiming it in one year doesn’t increase the amount you can claim in later years.
Q5: What happens if an asset is sold or disposed of? A5: If an asset is sold or disposed of, businesses must take into account any remaining unclaimed allowances, potentially leading to a balancing charge or allowance based on the difference between the sale price and the remaining written-down value.
Related Terms§
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Annual Investment Allowance (AIA): AIA allows businesses to deduct the full value of specified capital items, up to a certain limit, from their profits before tax for the year they were purchased.
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Capital Allowances: This broader term includes all allowances businesses can claim for capital expenditures, such as WDA, First-Year Allowance, and AIA.
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Depreciation: The accounting method of allocating the cost of a tangible asset over its useful life.
Online Resources§
Suggested Books for Further Studies§
- “Understanding Business Accounting For Dummies” by Colin Barrow and John A. Tracy
- “Financial Accounting: An Introduction” by Pauline Weetman
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
Accounting Basics: “Writing-Down Allowance” Fundamentals Quiz§
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