Here, the scrap value of the asset is deducted from the cost price. Then, that amount is divided by the number of years of estimated useful life of the asset. The figure so arrived is the annual depreciation under equal instalment method. This method is also known as straight-line method or fixed instalment method. Under this method, the amount of annual depreciation remains identical.

Procedure to determine the amount of depreciation:

This is very simple and widely used (popular) method to determine the amount of depreciation. The annual amount of depreciation can be obtained with the help of the following formula :
(1) Annual Depreciation D = C − S / N
(2) Annual Depreciation D = C × R / 100
Where, D = Depreciation
C = Cost price
S = Scrap value
N = Total number of years of useful life
R = Rate of depreciation

Features :

• Depreciation is calculated on the cost price of the asset.
• The amount of depreciation for each year remains equal.
• The graph of depreciation of each year remains in horizontal line.
• The depreciation amount is/fixed every year.

Advantages:

1. It is an easy method to understand.
2. The method of calculating depreciation is easy.
3. As the depreciation amount is the same every year, it is not required to be calculated repeatedly.
4. At the end of the useful life, the value of the asset becomes zero or equal to its scrap value.

Disadvantages:

• The amount of depreciation remains the same every year till the end of its useful life, whereas the repairs go on increasing as the asset becomes older.
• This method becomes complicated in case of assets which are frequently purchased and sold.
• This method does not consider the interest on capital blocked up in the asset.
• Here, no sufficient provision is made for the replacement of the asset.
• A proper balance cannot be maintained between the depreciation and the repairing expenses because in the initial years, the repairing expenses are less.
• While taking depreciation, only time factor is taken into consideration, e.g., the depreciation on the machines used in one shift is the same as the machines used in two shifts.