10. Annuity Method

Cost of an asset is considered to be an investment. such investment would earn interest if invested
outside the business.

D = Ci(1+i)n / (1+i)n -1


D= Depreciation
C= Cost of the asset
i= Rate of Deprecition
n= Life of the asset

Journal entries
1. Depreciation A/c Dr.
To Asset A/c
(Calculated from annuity table)
2. Asset A/c Dr.
To Interest A/c
(Calculated on diminishing values)

3. Profit & Loss A/c Dr. .
To Depreciation A/c

4. Interest A/c Dr.
To Profit & Loss A/c


Under Annuity Method:

Annual Depreciation = Ci (1 + i)n = 40,000 x 10% x 1.4641 = 12,619
----------- ----------------
(1+i) n -1 1.4641 - 1


In case of Annuity Method, the amount of Rs.12,619 shall not be invested outside the
business.
It shall have to be taken as an yearly appropriation. The total amount to be appropriated
over a period of 4 years = Rs.12,619 x 4 = Rs.50,476.
Cost of Capital = Total Appropriation - Actual Cost of the Asset = Rs.50,476 -40,000 =
Rs.10,476.