# 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 a definite period of life.

#### Depreciation can be calculated under the 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 charged by the following:

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

 Year ended Opening balance of an asset Interest Debited Amount of depreciation The 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.

### The journal entries under the Annuity Method: –

Now, we will post all the journal entries year by year according to the 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 the 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 the 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 the 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 the 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 the 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)

### The Assets account under the Annuity Method: –

Now, we will prepare an asset account under the 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