Methods of Depreciation - Fixed Instalment Method

It is a method of depreciation where the same (fixed) amount is reduced from an asset’s value every year until it reaches its scrap value or end of life.

Because the depreciation amount stays constant, the graph of depreciation forms a straight line, parallel to the X-axis, as shown in the below image.

This method is also known as

• Straight-Line Method (SLM)

• Original Cost Method

• Equal Instalment Method

Advantages

• Simple and easy to calculate.
• Equal charges each year make comparison of profits easy.
• Best for assets with uniform use, such as furniture, computers, and buildings.

Disadvantages

• Does not account for increasing repair costs over time.
• Unsuitable for assets that lose most of their value in early years (like vehicles).

\[\mathrm{Depreciation~(p.a.)~=~\frac{Original~cost~-~Scrap~Value}{Estimated~life~of~the~asset~(in~years)}}\]

Original cost of Asset = Purchasing price of an Asset + Incidental charges, etc.

A machine costs ₹15,000, installation ₹3,000, scrap value ₹2,000, and estimated life = 10 years.

Depreciation =  \[\frac{(15,000+3,000)-2,000}{10}\]

$Depreciation\; =\; ₹1,600per\; year$

\[\text{Depreciation (p.a.)}=\frac{\text{Cost of the Asset × Rate of depreciation}}{100}\]

Note: If the asset is used for only part of the year, charge depreciation in proportion to the time used.

A company purchased machinery for ₹80,000.
Depreciation rate = 10% p.a.

Here, depreciation is constant (₹8,000) each year.

• The Fixed Instalment Method (also called the Straight-Line or Original Cost Method) charges the same amount of depreciation every year on the original cost of an asset until its value drops to zero or scrap value.​

• This method is easy to calculate and allows easy profit comparisons since the annual charge remains constant.​

• Best suited for assets with steady usage like furniture, buildings, or computers; not ideal for assets that lose value quickly or require more repairs over time (such as vehicles).​

• The depreciation graph forms a straight horizontal line parallel to the X-axis, showing equal expense each year—hence the name Straight-Line Method.