Comparing Fixed Instalment and Diminishing Balance Methods of Depreciation

Two accountants can depreciate the same delivery van, over the same five years, and still land on completely different profit figures for year one. The gap isn’t a mistake. It comes down to which depreciation method they picked: the fixed instalment method or the diminishing balance method. Both are legitimate, both are widely used across Indian businesses, and both tell a very different story about how an asset loses value. If you’re studying financial accounting, this is one of those topics that looks simple on paper but trips people up in exams because the two methods get mixed up constantly. Let’s fix that.

What depreciation actually measures 🔗

Depreciation is the systematic way of spreading the cost of a fixed asset over the years it’s expected to be useful. It’s not about tracking market value. A machine’s resale price might crash in year one and recover slightly in year three, but depreciation doesn’t care about that swing. It simply allocates the asset’s cost against the revenue it helps generate, following the matching principle of accounting.

The method chosen to do this allocation matters because it directly changes the depreciation charge in the profit and loss account each year, and the asset’s book value on the balance sheet. That’s why the fixed instalment method and diminishing balance method are treated as a core comparison topic in every financial accounting syllabus.

The fixed instalment method: same charge, every year 🔗

The fixed instalment method, also called the straight line method or equal instalment method, charges depreciation on the original cost of the asset. That original cost stays fixed throughout the asset’s life, so the depreciation amount stays fixed too. The asset is written down by an equal amount every year until its book value reaches the scrap value.

The formula is straightforward:

Annual depreciation = (Original cost − Scrap value) ÷ Useful life

A worked example 🔗

Say a company buys office furniture for ₹1,00,000, expects to use it for 5 years, and estimates a scrap value of ₹10,000 at the end. Annual depreciation works out to (₹1,00,000 − ₹10,000) ÷ 5 = ₹18,000. That ₹18,000 charge repeats every single year, regardless of how the furniture is actually holding up.

The diminishing balance method: shrinking charge on shrinking value 🔗

The diminishing balance method, also known as the written down value (WDV) method or reducing balance method, applies a fixed percentage rate not to the original cost, but to the asset’s book value at the start of each year. Since that book value keeps shrinking, the rupee amount of depreciation shrinks along with it, even though the rate stays the same.

The formula:

Annual depreciation = Book value at start of year × Rate of depreciation

The same asset, a different method 🔗

Using the same furniture worth ₹1,00,000, if the company applies a 20% WDV rate instead, the numbers look like this:

Notice two things. First, the depreciation charge drops every year: from ₹20,000 down to ₹8,192. Second, unlike the fixed instalment method, the book value under WDV mathematically never touches zero. It only gets closer to it. That’s a structural feature of the method, not an error.

Key differences between the two methods 🔗

Here’s where students usually lose marks in exams, because the differences sound similar until you line them up side by side.

How each method plays out on financial statements 🔗

The choice of method doesn’t just change a number in a working note. It changes the shape of reported profit and asset values over time.

Effect on the profit and loss account 🔗

Under the fixed instalment method, profit typically declines slightly year on year in the early period, because depreciation stays flat while repair and maintenance costs on an ageing asset usually climb. Under the diminishing balance method, the opposite tends to happen: heavier depreciation upfront is gradually offset by lower depreciation later, which can keep the combined charge (depreciation plus repairs) more stable across the asset’s life.

Effect on the balance sheet 🔗

Fixed instalment method assets show a straight-line decline toward scrap value on the balance sheet. Diminishing balance assets show a curve, dropping sharply in early years and flattening out later, since each year’s charge is a percentage of an already-reduced base.

Why the choice of method isn’t arbitrary in India 🔗

This isn’t just a textbook exercise. Indian law actively recognises both methods, and the context decides which one applies.

Under company law, Schedule II of the Companies Act, 2013 allows companies to choose between the straight line method and the written down value method, based on the useful life prescribed for each asset class, with residual value ordinarily capped at 5% of original cost. The company selects whichever pattern best reflects how the asset’s economic benefits are actually consumed.

Taxation works differently. The Income-tax Act prescribes the written down value method for most businesses, calculated on a “block of assets” rather than asset by asset, with only power generation and distribution undertakings permitted to use the straight line method. So a manufacturing company might use the fixed instalment method for its own financial reporting under the Companies Act, while its tax return is computed entirely on the WDV basis. This dual system is why the two figures for depreciation often don’t match, creating what’s recorded as deferred tax in the books.

Choosing the right method for the right asset 🔗

In practice, the decision usually comes down to how an asset behaves:

• Steady, predictable wear: Buildings, furniture, and fixtures don’t lose most of their value in the first year or two. The fixed instalment method matches this pattern well, since the benefit from the asset is roughly the same each year.
• Rapid early decline: Vehicles, computers, and technology-driven machinery tend to lose value and utility fastest right after purchase, often due to obsolescence. The diminishing balance method reflects that front-loaded loss more accurately.
• Repair-heavy assets: Machinery that needs increasing maintenance as it ages often suits WDV, since lower depreciation charges in later years balance out rising repair bills, keeping the combined cost more consistent.

A quick way to remember the difference 🔗

If you’re prepping for exams, anchor it to one phrase: fixed instalment method depreciates a fixed number on a fixed base (original cost), while diminishing balance method applies a fixed rate on a diminishing base (book value). The rate versus amount distinction is usually where confusion creeps in, so it’s worth writing that sentence out until it’s automatic.

What do you think? If you were advising a small business buying its first delivery vehicle, would you lean toward the fixed instalment method for simplicity, or the diminishing balance method to match the vehicle’s real-world value loss? And does it make sense that Indian tax law and company law can require two different depreciation figures for the same asset?

References

1. https://www.geeksforgeeks.org/accountancy/difference-between-straight-line-and-written-down-value-method-of-calculating-depreciation/
2. https://www.accountingnotes.net/depreciation/straight-line-and-written-down-value-method-of-depreciation-differences/4130
3. https://taxguru.in/company-law/depreciation-rate-chart-as-per-companies-act-2013-with-related-law.html
4. https://www.incometaxindia.gov.in/w/depreciation-under-the-income-tax-act
5. https://www.motilaloswal.com/personal-finance/tax/depreciation-in-income-tax-rates-and-calculation-guide