Annuity Method of Depreciation | Example |

Annuity Method Feature image

Annuity Method:

In Annuity method, we will calculate a fixed amount of depreciation on the original cost of an asset but also calculate interest on the invested amount of capital on the purchase of this asset with help of annuity table.

We will debit an asset account with the amount of interest earn at a fixed rate on the balance of an asset at the reduced value and charged fixed amount or rate of depreciation every year for the estimated life of an asset.

This method is suitable for those assets on which lager amount was invested and have the definite period life.

Depreciation can be calculated under Annuity method shown below:

Example:

We purchased an asset on lease on 01/04/2016  for five years at a cost of Rs. 50,00,000/-. It is proposed to depreciate the lease by annuity method by charging loss of normal rate of interest @5%. With the help of annuity table, we get know the amount of depreciation to be charge by following:

Re. 1 must write off a sum of Re. 0.230975 every year.

Depreciation Example of Annuity method  - Annuity Method of Depreciation | Example |

 

Year ended  Opening balance of an asset Interest Debited Amount of depreciation  Closing balance of an asset
31-03-2017  50,00,000 2,50,000   11,54,875 40,95,125
31-03-2018 40,95,125 2,04,760   11,54,875 31,45,010
31-03-2019 31,45,010 1,57,250 11,54,875 21,47,385
31-03-2020   21,47,385 1,07,370 11,54,875 10,99,880 
31-03-2021 10,99,880 54,995     11,54,875  0

*Closing Balance = Opening Balance of an Asset + Interest Debited – Amount of Depreciation. 

Now, we will post all the journal entries year by year according to Annuity Method of Depreciation as follows: – 

Date

Particulars

L.F.

  Debit 

  Credit 

1st Year
2016-17
01-Apr Lease A/c Dr. 50,00,000
To Bank A/c 50,00,000
(Being land purchased on lease )
31-Mar Lease A/c Dr. 2,50,000
To Interest A/c 2,50,000
(Being Interest @ 5% charged on closing balance of an asset)
31-Mar Depreciation A/c Dr. 11,54,875
To Lease A/c 11,54,875
(Being Depreciation on asset charged)
31-Mar Profit or loss A/c Dr. 11,54,875
To Depreciation A/c 11,54,875
(Being Depreciation transfer to P&L A/c)
2nd Year
2017-18
31-Mar Lease A/c Dr. 2,04,760
To Interest A/c 2,04,760
(Being Interest @ 5% charged on closing balance of an asset)
31-Mar Depreciation A/c Dr. 11,54,875
To Lease A/c 11,54,875
(Being Depreciation on asset charged)
31-Mar Profit or loss A/c Dr. 11,54,875
To Depreciation A/c 11,54,875
(Being Depreciation transfer to P&L A/c)
3rd Year
2017-18
31-Mar Lease A/c Dr. 1,57,250
To Interest A/c 1,57,250
(Being Interest @ 5% charged on closing balance of an asset)
31-Mar Depreciation A/c Dr. 11,54,875
To Lease A/c 11,54,875
(Being Depreciation on asset charged)
31-Mar Profit or loss A/c Dr. 11,54,875
To Depreciation A/c 11,54,875
(Being Depreciation transfer to P&L A/c)
4th Year
2017-18
31-Mar Lease A/c Dr. 1,07,370
To Interest A/c  1,07,370
(Being Interest @ 5% charged on closing balance of an asset)
31-Mar Depreciation A/c Dr. 11,54,875
To Lease A/c 11,54,875
(Being Depreciation on asset charged)
31-Mar Profit or loss A/c Dr. 11,54,875
To Depreciation A/c 11,54,875
(Being Depreciation transfer to P&L A/c)
5th Year
2017-18
31-Mar Lease A/c Dr. 54,995
To Interest A/c 54,995
(Being Interest @ 5% charged on closing balance of an asset)
31-Mar Depreciation A/c Dr. 11,54,875
To Lease A/c  11,54,875
(Being Depreciation on asset charged)
31-Mar Profit or loss A/c Dr. 11,54,875
To Depreciation A/c 11,54,875
(Being Depreciation transfer to P&L A/c)

Now, we will prepare an asset account under Annuity Method of Depreciation shown below:

Lease Account

Date

Particulars

Amount

Date

Particulars

Amount

01-04-2017 To Bank A/c 50,00,000 31-03-2018 By Depreciation A/c 11,54,875
31-03-2018 To Interest A/c 2,50,000 31-03-2018 By Balance C/d 40,95,125
52,50,000 52,50,000
01-04-2018 To Balance B/d 40,95,125 31-03-2019 By Depreciation A/c 11,54,875
31-03-2019 To Interest A/c 2,04,760 31-03-2019 By Balance C/d 31,45,010
42,99,885 42,99,885
01-04-2019 To Balance B/d 31,45,010 31-03-2020 By Depreciation A/c 11,54,875
31-03-2020 To Interest A/c 1,57,250 31-03-2020 By Balance C/d 21,47,385
33,02,260 33,02,260
01-04-2020 To Balance B/d 21,47,385 31-03-2021 By Depreciation A/c 11,54,875
31-03-2021 To Interest A/c 1,07,370 31-03-2021 By Balance C/d 10,99,880
22,54,755 22,54,755
01-04-2021 To Balance B/d 10,99,880 31-03-2022 By Depreciation A/c 11,54,875
31-03-2022 To Interest A/c 54,995 31-03-2022 By Balance C/d 0
11,54,875 11,54,875

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