What is annuity method of deprecation?

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02-10-2020
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Question

What is annuity method of deprecation?

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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

Year	3%	4%	5%
1	1.030	1.040	1.050
2	0.523	0.530	0.538
3	0.354	0.360	0.367
4	0.269	0.275	0.280
5	0.218	0.225	0.231
6	0.185	0.191	0.197
7	0.160	0.167	0.173
8	0.142	0.148	0.155
9	0.128	0.134	0.141
10	0.117	0.123	0.130
11	0.108	0.114	0.120
12	0.101	0.107	0.113
13	0.094	0.100	0.106
14	0.089	0.095	0.101
15	0.084	0.089	0.096

Journal entry

Date	Particulars	Dr	Cr
XX/XX/XXXX	Asset accountTo bank account (Being asset is acquired)	XXXXX	XXXXX
XX/XX/XXXX	Asset accountTo Interest account (Being interest on capital sunk in asset )	XXXXX	XXXXX
XX/XX/XXXX	Depreciation accountTo asset account (Being the depreciation of asset )	XXXXX	XXXXX

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.

Mandalika

Published on 26-Sep-2020 17:24:23

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