Differentiate between sinking fund depreciation and annuity method of depreciation.

Banking & FinanceFinanceFinance Management

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.
raja
Published on 29-Sep-2020 17:13:06
Advertisements