Annuity Method of Depreciation | Example |

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