Sinking fund method to calculate depreciation posted by
What is sinking fund method of calculating depreciation?
It is also known as Depreciation fund method. Under this method a sinking fund
or depreciation fund is created. Every year the profit and loss account is
debited and fund account is credited with a sum, which is calculated such that
the annual sum credited to the fund account which is accumulating throughout
the life of the asset will be equal to the sum required to replace the old
asset. The main advantage of this method is that it accumulates interest or
dividends by regular investment of cash outside the business e.g.in securities
to finance the replacement of the assets, which has become useless. But on the
other hand this method has disadvantage also as the burden of profit and loss
account goes on increasing as years pass by since the amount spent on repairs
and maintenance goes on increasing due to the wear and tear of the asset and
the amount of depreciation remains same.
Explain endowment policy method of calculating depreciation.
This method is similar to Sinking Fund method except in this method instead of
investing in securities the amount set aside is used to pay premium on an
Endowment Policy. And the policy should mature on the date on which the ceases
its useful life. This collected money is then used to replace the expired