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 asset.