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Annuity Method of Depreciation | Example |

Annuity Method Feature image
Annuity Method Feature image

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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.

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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:

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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.

Depreciation Example of Annuity method

Year ended Opening balance of an assetInterest DebitedAmount of depreciation The closing balance of an asset
31-03-2017 50,00,0002,50,000  11,54,87540,95,125
31-03-201840,95,1252,04,760  11,54,87531,45,010
31-03-2019 31,45,0101,57,250 11,54,87521,47,385
31-03-2020  21,47,3851,07,37011,54,875 10,99,880 
31-03-202110,99,880 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: – 

DateParticularsL.F.  Debit   Credit 
1st Year
2016-17
01-AprLease A/cDr.50,00,000
To Bank A/c50,00,000
(Being land purchased on lease )
31-MarLease A/cDr.2,50,000
To Interest A/c2,50,000
(Being Interest @ 5% charged on the closing balance of an asset)
31-MarDepreciation A/cDr.11,54,875
To Lease A/c11,54,875
(Being Depreciation on asset charged)
31-MarProfit or loss A/cDr.11,54,875
To Depreciation A/c11,54,875
(Being Depreciation transfer to P&L A/c)
2nd Year
2017-18
31-MarLease A/cDr.2,04,760
To Interest A/c2,04,760
(Being Interest @ 5% charged on the closing balance of an asset)
31-MarDepreciation A/cDr.11,54,875
To Lease A/c11,54,875
(Being Depreciation on asset charged)
31-MarProfit or loss A/cDr.11,54,875
To Depreciation A/c11,54,875
(Being Depreciation transfer to P&L A/c)
3rd Year
2017-18
31-MarLease A/cDr.1,57,250
To Interest A/c1,57,250
(Being Interest @ 5% charged on the closing balance of an asset)
31-MarDepreciation A/cDr.11,54,875
To Lease A/c11,54,875
(Being Depreciation on asset charged)
31-MarProfit or loss A/cDr.11,54,875
To Depreciation A/c11,54,875
(Being Depreciation transfer to P&L A/c)
4th Year
2017-18
31-MarLease A/cDr.1,07,370
To Interest A/c 1,07,370
(Being Interest @ 5% charged on the closing balance of an asset)
31-MarDepreciation A/cDr.11,54,875
To Lease A/c11,54,875
(Being Depreciation on asset charged)
31-MarProfit or loss A/cDr.11,54,875
To Depreciation A/c11,54,875
(Being Depreciation transfer to P&L A/c)
5th Year
2017-18
31-MarLease A/cDr.54,995
To Interest A/c54,995
(Being Interest @ 5% charged on the closing balance of an asset)
31-MarDepreciation A/cDr.11,54,875
To Lease A/c 11,54,875
(Being Depreciation on asset charged)
31-MarProfit or loss A/cDr.11,54,875
To Depreciation A/c11,54,875
(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
DateParticularsAmountDateParticularsAmount
01-04-2017To Bank A/c50,00,00031-03-2018By Depreciation A/c11,54,875
31-03-2018To Interest A/c2,50,00031-03-2018By Balance C/d40,95,125
52,50,00052,50,000
01-04-2018To Balance B/d40,95,12531-03-2019By Depreciation A/c11,54,875
31-03-2019To Interest A/c2,04,76031-03-2019By Balance C/d31,45,010
42,99,88542,99,885
01-04-2019To Balance B/d31,45,01031-03-2020By Depreciation A/c11,54,875
31-03-2020To Interest A/c1,57,25031-03-2020By Balance C/d21,47,385
33,02,26033,02,260
01-04-2020To Balance B/d21,47,38531-03-2021By Depreciation A/c11,54,875
31-03-2021To Interest A/c1,07,37031-03-2021By Balance C/d10,99,880
22,54,75522,54,755
01-04-2021To Balance B/d10,99,88031-03-2022By Depreciation A/c11,54,875
31-03-2022To Interest A/c54,99531-03-2022By Balance C/d0
11,54,87511,54,875

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