Coupon Accepted Successfully!


Annuity Method

This method takes into account, the interest on the amount invested in the purchase of the asset. It assumes that the amount invested in acquiring the asset, if invested elsewhere, would have earned interest which must be reckoned as a part of the cost of using the asset. The amount required to be written off every year is calculated with the help of annuity table.



  • It takes into account, the interest on amount invested in purchase of the asset
  • The amount of interest to be provided diminishes every year
  • Interest is calculated on written down value of asset every year
  • A fixed amount of depreciation is charged every year


  • This method takes into account, the time value of money and provides for interest on the amount invested


  • This method is not suitable for assets of a small amount
  • This method is also not suitable for assets like plant and machinery because of frequent changes in the value of such assets, as recalculation of amount of depreciation to be written off is difficult



This method is suitable for leases in respect of which a lump sum payment is made in advance.



Journal Entries


Illustration 7
A lease is purchased on 1st April, 2010 for 4 years at a cost of ₹ 10,000. It is proposed to depreciate the lease by annuity method charging interest @ 5% p.a. A reference to the annuity table shows that to depreciate ₹ 1 by annuity method over 4 years charging interest at 5% p.a., one must write off a sum of ₹ 0.2820. Show the Lease Account for four years and also the relevant entries in the Profit and Loss Account.




Test Your Skills Now!
Take a Quiz now
Reviewer Name