Annuity Method of DEPRECIATION

Under this method the assets is regarded as an investment earning a fixed rate of interest. Therefore, under this method the amount of the total depreciation is determined by adding the cost of the asset and interest thereon at an expected rate. The amount of depreciation is determined with the help of annuity table which is given at the end of this topic.

Accounting Entries

Under this method journal entries have to make in respect of (i) Interest and (ii) Depreciation.

As regards interest Account at the commencement of the period at the given rate. The entry for the interest is.

  1. Asset Account

To Interest Account

Being interest on capital invested in asset.

  1. Depreciation Account To Asset Account Being depreciation of asset.

Advantages

1.         It is most scientific, exact and precise.

It takes into Account the interest on the capital invested in the asset. The system is very complicated.

IV.       This method is not suitable for those assets which require frequent, additions and
extension.

Disadvantages

1.         In calculation this system is very complicated.

When the asset requires frequent additions and extension its calculation becomes much inconvenient.

Under this method the burden on profit and loss Account goes on increasing with the passage of time as the depreciation charge remain constant but the amount of interest goes on diminishing year after year.

Scope of Application

This method is best suitable to those assets which require considerable investment and which do not cash for frequent addition for example long leaser etc.

The amount of annual depreciation to be written off by the Annuity method will be ascertained from Annuity table, an extract

of which is given below:-

Year

3%

3 1/2%

4%

4 1/2%

5%

3

.353530

.356034

.360348

.360348

.367208

4

.289027

.272251

.275490

.278743

.282011

5

.218354

.221481

.226427

.227791

.230974

10

.117230

.120241

.123290

.126378

.129504

15

.083766

.086825

.089941

.093113

.096342

20

.067215

.070361

.073681

.076876

.080242

 

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