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What is annuity method of deprecation?
In the annuity deprecation, method investment asset is considered as investment which yields fixed interest rate until the book value of asset becomes zero. Based on annuity table amount is calculated. This method is also known as compound interest method. This method is not approved by Generally Accepted Accounting Principles (GAAP). This method is suitable for assets, which require regular investments and need fewer changes.
|XX/XX/XXXX||Asset accountTo bank account|
(Being asset is acquired)
|XX/XX/XXXX||Asset accountTo Interest account|
(Being interest on capital sunk in asset )
|XX/XX/XXXX||Depreciation accountTo asset account|
(Being the depreciation of asset )
Advantages of annuity method of deprecation are −
- Interest on capital investment is considered.
- Most scientific.
Disadvantages of annuity method of deprecation are −
- More complicated
- Calculations need to change when, there are any extensions or additions on asset.
- P&L Account increases as years goes on.
- How is Annuity Due different from General Annuity?
- Differentiate between sinking fund depreciation and annuity method of depreciation.
- Give the journal entry for the sinking fund deprecation method.
- Compare annuity and lump sum.
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