9. Sinking Fund Method

Annual depreciation is considered as a source of providing the replacement cost of an asset. It becomes a means of maintaining capital.

D = Ci.
_______
(1+i)n -1.

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





Notes:
(1) No investment is made in the last year as the investments are to be sold out.
(2) Sinking Fund Account may be called Depreciation Fund Account also. It is to be shown
on the liability side of Balance Sheet.
(3) Sinking Fund Investments Account may be called Depreciation Fund Investments Account
also. It is to be shown on the Asset side of the Balance Sheet.
(4) Annual Contribution (charged in lieu of annual depreciation) = Original Cost x Present
Value of Re. 1 at given interest rate.
Illustration: Cost of an Asset Rs.40,000 Life:4 years. Depreciation 10% p.a.
Under Sinking Fund Method:
Annual Depreciation = Ci
------
(1+i) n -1
This amount shall be invested at the end of years 1,2 and 3. The amount of investment shall fetch 10% interest p.a. which will lead to accumulation of Rs.40,000 at the end of the 4th year.

The amount of Rs.8,619 shall not be invested at the end of the 4th year.