This method not only takes depreciation into account but also makes provision for the replacement of asset when it becomes useless. Under this method a fixed amount is debited every year to Depreciation Account or Profit and Loss Account and is credited to Depreciation Fund Account, instead of Asset Account.
In the sinking fund method of depreciation, a fixed depreciation charge is made every year and the interest is compounded on it annually. The constant depreciation charge is such that the sum of annual investment and the interest accumulations is equal to the cost of replacement of equipment after its useful life.
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This method not only takes depreciation into account but also makes provision for the replacement of asset when it becomes useless. Under this method a fixed amount is debited every year to Depreciation Account or Profit and Loss Account and is credited to Depreciation Fund Account, instead of Asset Account.
In the sinking fund method of depreciation, a fixed depreciation charge is made every year and the interest is compounded on it annually. The constant depreciation charge is such that the sum of annual investment and the interest accumulations is equal to the cost of replacement of equipment after its useful life.