Differentiate between sinking fund depreciation and annuity method of depreciation.

The major differences between sinking fund depreciation and annuity method of depreciation.

Sinking fund depreciation

• Amount generated through depreciation is invested in market securities.
• Funds available for replacement of assets.
• First entry of interest will be made at the end of second year.
• Sinking fund table is used to calculate depreciation.
• Cost – interest = depreciation charged.
• Interest increases with years.
• Asset value is same.
• Effect on P&L is same.

Annuity method of depreciation

• Amount generated through depreciation is not invested in market securities.
• Funds not available for replacement of funds.
• Interest will be earned from starting day onwards.
• Annuity table is used to calculate depreciation.
• Cost + interest = depreciation charged.
• Interest decreases with years.
• Asset value decreases.
• Effect on P&L account increases.