The Fixed Instalment Method of Depreciation Explained

Every business that owns fixed assets – machinery, furniture, vehicles, buildings – needs a systematic way to spread that asset’s cost over the years it stays useful. The fixed instalment method, more commonly called the straight-line method, is the oldest and most widely taught way to do this. It is simple, predictable, and forms the foundation for understanding every other depreciation technique you will encounter in financial accounting.

What is the fixed instalment method? 🔗

The fixed instalment method charges the same amount of depreciation every year over an asset’s useful life. Because the depreciation charge is a fixed instalment each year – rather than a fixed percentage of a shrinking balance – this method gets its name. It is also called the straight-line method because when you plot the annual depreciation charge on a graph, the line stays constant, forming a straight horizontal line rather than a curve.

The underlying assumption is that an asset delivers roughly the same benefit to the business every year of its working life. A delivery van, for instance, is assumed to be just as useful in year three as it was in year one, so it should absorb an equal share of cost in both years.

The formula 🔗

The standard formula used across accounting textbooks and professional guidance is straightforward:

Putting these together, the annual depreciation charge is calculated as:

Annual Depreciation = (Original Cost − Scrap Value) ÷ Estimated Useful Life

A worked example 🔗

Suppose a firm buys machinery for ₹1,80,000 and spends ₹10,000 on installation, bringing the total cost to ₹1,90,000. The machinery is expected to last 5 years and have a residual value of ₹15,000 at the end of that period. Applying the formula:

Depreciation = (₹1,90,000 − ₹15,000) ÷ 5 = ₹35,000 per year

The business will charge exactly ₹35,000 as depreciation expense every year for five years, regardless of how intensively the machine is actually used in any given year.

Calculating the depreciation rate 🔗

Sometimes the question gives you a rate instead of asking you to derive the annual amount directly. In that case, the rate of depreciation is calculated as annual depreciation divided by original cost, expressed as a percentage. For an asset with no scrap value costing ₹2,50,000, depreciated at 10% per annum, the annual charge works out to ₹25,000, and the book value falls by an identical ₹25,000 every year until it eventually reaches zero or the estimated scrap value.

Adjusting for partial years 🔗

If an asset is purchased partway through the accounting year, depreciation is charged only for the period it was actually used, not the full year. So if a machine is bought on 1 October and the accounting year ends on 31 March, only six months of depreciation is booked in that first year. This proportionate adjustment keeps the expense matched to actual usage.

How the fixed instalment method fits Indian regulatory requirements 🔗

In India, companies governed by the Companies Act, 2013 must compute depreciation under Schedule II, which shifted the approach from prescribed rates to useful-life-based depreciation. Two important rules apply directly to the fixed instalment method:

• Residual value cap: The residual value assumed for an asset generally should not exceed 5% of its original cost, unless the company can justify a different figure with technical backing.
• Prescribed useful life: Part C of Schedule II lists indicative useful lives for various asset categories, which companies are expected to follow unless they have valid grounds to deviate.

It’s worth noting that the Companies Act treatment is meant purely for financial reporting. The Income Tax Act, on the other hand, mandates the written down value (WDV) method for computing taxable income, using its own fixed rates under Appendix I. This means a company often maintains two separate depreciation schedules – one under the straight-line method for its books of account, and another under WDV for tax filings.

Straight-line method versus written down value method 🔗

Students often confuse the two most common depreciation approaches, so a side-by-side comparison helps:

Why students and accountants favour this method 🔗

Simplicity and predictability 🔗

Because the depreciation figure never changes, budgeting and forecasting become far easier. A finance team preparing next year’s profit and loss projections doesn’t need to recalculate anything – the depreciation line item is already known.

Easy comparison across years 🔗

Since the same amount is charged every year, comparing net profit figures across accounting periods becomes cleaner. Analysts don’t have to adjust for a swinging depreciation expense when judging whether operating performance actually improved.

Reduces the asset to zero (or scrap value) systematically 🔗

By design, the method ensures the asset’s book value is written down to its residual value exactly at the end of its estimated useful life – no more, no less.

Suitable for steady-use assets 🔗

Assets like furniture, buildings, and fixtures that don’t see dramatically different usage patterns from year to year are natural fits for this method, since their maintenance costs and productivity also tend to stay fairly level over time.

Where the method falls short 🔗

No depreciation method is perfect, and the fixed instalment method has some well-documented limitations:

• Ignores rising repair costs: As machinery ages, repair and maintenance expenses typically increase, while depreciation stays flat. This creates an uneven total cost burden across the asset’s life even though the depreciation charge looks even.
• Doesn’t reflect real-world wear patterns: Many assets, particularly vehicles and technology equipment, lose the bulk of their value in the first few years of use. Charging equal depreciation throughout doesn’t capture this front-loaded decline.
• Assumes accurate estimates upfront: The method depends heavily on getting the useful life and scrap value estimates right at the time of purchase. If these estimates turn out to be wrong, the depreciation charged over the years will not reflect the asset’s actual economic consumption.
• Not ideal for assets with frequent additions: When an asset undergoes regular expansion or modification, tracking a single straight-line schedule for the combined cost becomes cumbersome.

Journal entries under this method 🔗

Recording depreciation under the fixed instalment method follows the standard double-entry pattern. Each year, the depreciation account is debited and the asset account (or a separate accumulated depreciation account) is credited with the same fixed amount. Because the figure doesn’t change year to year, posting these entries becomes almost mechanical once the initial calculation is done – one more reason this method remains a favourite for teaching the basics of asset accounting.

What do you think? 🔗

What do you think? If you were managing a fleet of company vehicles that lose most of their value in the first two years, would you still choose the fixed instalment method for simplicity, or switch to a method that mirrors the actual pattern of value loss? And when residual value estimates turn out to be wildly off after a few years, how should a business go about correcting the depreciation already charged?

References

1. https://www.shaalaa.com/concept-notes/methods-of-depreciation-fixed-instalment-method_2019
2. https://eduyush.com/en-us/blogs/accounting/straight-line-method-of-depreciation
3. https://taxguru.in/company-law/schedule-ii-of-companies-act-2013.html
4. https://cleartax.in/s/methods-of-depreciation
5. https://www.brainkart.com/article/Straight-line-method–Fixed-instalment-method—Original-cost-method_34214/