What is annuity method of deprecation?

Banking & FinanceFinance ManagementGrowth & Empowerment

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.

                    Annuity table

Year3%4%5%
11.0301.0401.050
20.5230.5300.538
30.3540.3600.367
40.2690.2750.280
50.2180.2250.231
60.1850.1910.197
70.1600.1670.173
80.1420.1480.155
90.1280.1340.141
100.1170.1230.130
110.1080.1140.120
120.1010.1070.113
130.0940.1000.106
140.0890.0950.101
150.0840.0890.096

Journal entry

DateParticularsDrCr
XX/XX/XXXXAsset accountTo bank account
(Being asset is acquired)
XXXXXXXXXX
XX/XX/XXXXAsset accountTo Interest account
(Being interest on capital sunk in asset )
XXXXXXXXXX
XX/XX/XXXXDepreciation accountTo asset account
(Being the depreciation of asset )
XXXXXXXXXX

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.
raja
Published on 26-Sep-2020 13:54:23
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