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Differentiate between sinking fund depreciation and annuity method of depreciation.
The major differences between sinking fund depreciation and annuity method of depreciation.
Sinking fund depreciation
- Amount generated through depreciation is invested in market securities.
- Funds available for replacement of assets.
- First entry of interest will be made at the end of second year.
- Sinking fund table is used to calculate depreciation.
- Cost – interest = depreciation charged.
- Interest increases with years.
- Asset value is same.
- Effect on P&L is same.
Annuity method of depreciation
- Amount generated through depreciation is not invested in market securities.
- Funds not available for replacement of funds.
- Interest will be earned from starting day onwards.
- Annuity table is used to calculate depreciation.
- Cost + interest = depreciation charged.
- Interest decreases with years.
- Asset value decreases.
- Effect on P&L account increases.
Updated on: 29-Sep-2020
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