DISTINCTION BETWEEN SINKING FUND AND ANNUITY METHODS OF DEPRECIATION :

(i) Under sinking fund method, the annual amount is set aside to a separate fund account. However, the annual amount is not set aside to a separate fund account in annuity method.

(ii) Since annual amount set aside are invested in outside securities, sufficient funds will be available for replacement of asset under sinking fund method. However, there is no provision of funds at the time of replacement of assets in annuity method.

(iii) In sinking fund method, as the investment is made at the end of the first year, the first interest is earned only during the second year. In annuity method, interest is assumed to accrue in the first year of purchase of asset, therefore, it is charged from the end of the first year.

(iv) Under sinking fund method, the total depreciation is less than the asset’s depreciable cost due to deduction of interest. However, in annuity method, as the interest is added to the cost of the asset, the total depreciation is more than the depreciable cost of the asset.

(v) Under sinking fund method, interest is actually realised since it is to be received from investments outside the business. In annuity method, interest is only assumed as against actual receipt.

(vi) Under sinking fund method, annual net effect on profit and loss account is same because of uniform fixed amount of depreciation. However, in annuity method, annual net effect on profit and loss account increases due to fixed depreciation charge and declining interest.

(vii) Under sinking fund method, interest realised is credited to sinking fund account, while interest is credited to profit and loss account and debited to asset account in annuity method.