Fixed Installment Method

INTRODUCTION TO FIXED INSTALLMENT METHOD

Straight line method is also known as fixed installment, fixed percentage and original cost method. Fixed installment method is one of the methods of allocating depreciation. In this method, every year a fixed amount of depreciation is deducted from the value of assets and the same amount is debited to profit and loss account. The book value of the assets is reduced to zero at the end of the expected life. The formula for calculating the amount of depreciation is as follows:

Annual Depreciation = (Original Value – Scrap Value)/Estimated life of the assets

If the rate of depreciation is given, the depreciation is calculated with the help of the following formula:

Annual Depreciation = Original Value× \(\frac{Rate \;of \;depreciation}{100}\)

If the rate of depreciation has to be determined:

Rate of Depreciation = \(\frac{1}{Life\;of\; Asset}\) × 100

Or

Rate of Depreciation = \(\frac{Amount \;of\; Depreciation}{Depreciable\; Value}\) × 100

Advantage of Fixed Installment Method

The advantages of fixed installment method are as follows:

• This method is suitable for those assets whose working life can easily be estimated.

• It is simple to understand and easy to calculate.

• The valuation of the assets takes place appropriately every year in the Balance Sheet.

• This method is accepted by many accounting bodies.

Disadvantage of Fixed Installment Method

The disadvantages of fixed installment of method are as follows:

• It is not suitable for those assets which are subject to addition and extension from time to time.

• It is an illogical method as the value of used assets is declining every year but depreciation is calculated on the basis of original cost.

• It ignores the interest expenses on investment.

• The amount of depreciation is not same over different years in reality.

Method of Recording Depreciation

The following journal entries are passed while keeping the record of depreciation:

1. For assets purchased:

Assets a/c…………………….Dr
To Bank a/c

2. For depreciation charged at the end of year:

Depreciation a/c………………….Dr
To Assets a/c

3. For transfer of depreciation to Profit and Loss Account:

Profit and Loss a/c……………………….Dr
To Depreciation a/c

4. For assets sold:

Bank a/c……………………….Dr
To Assets a/c

5. For gain on sale of assets:

Assets a/c…………………….Dr
To Profit and Loss a/c

6. For loss on sale of assets:

Profit and Loss a/c……………….Dr
To Assets a/c

ILLUSTRATION 1

Following information is given:

1. Purchase price of furniture Rs.40000
2. Carriage and installation charge Rs. 8000
3. Scrap value Rs. 10000
4. Rate of depreciation is @20% p.a

Required:

1. Amount of depreciation
2. Journal entries and furniture account for three year

Solution

Annual Depreciation = (Purchase price + carriage and installation charges – scrap value) × \(\frac{Rate\; of\; depreciation}{100}\)

= (40000 + 8000 – 10000) × \(\frac{20}{100}\)

= Rs. 8400 p.a.

Journal entries

In the book of…………………….

Furniture Account

References:

Sharma, Narendra et.al., Principles of Accounting-XI, Bundipuran Prakashan, Kathmandu

Koirala, Yadav Raj et.al., Principles of Accounting-XI, Asmita Books Publication, Kathmandu

Shrestha, Dasharaha et.al., Accountancy-XI, M.K. Prakashan, Kathmandu