Fundamentals of Accounting · Depreciation and Amortization

Other Methods of Depreciation: Annuity, Sinking Fund and More

Updated 11 October 2026 · Fact-checked

Other methods of depreciation are ways to spread an asset's cost besides straight line and written down value. They include annuity, depletion, machine hour, sum of years digits, insurance policy and sinking fund. To solve a question, identify the method, find the yearly charge using its rule, then pass the entries.

Understand Other Methods of Depreciation

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life (AS 10, para 6). Straight line and written down value are the two methods you meet first. But the standard says the method used should reflect the pattern in which the asset's future economic benefits are expected to be consumed (para 62). Different assets are consumed in different ways, so other methods exist.

AS 10 para 64 names the straight-line, diminishing balance and units of production methods. The methods in this topic are other ways used in practice to apply the same idea. Here is what each one does:

Machine hour method: the charge depends on hours the machine runs. It is a usage-based method, like units of production.
Depletion method: used for wasting assets such as mines, quarries and oil wells. The charge depends on the quantity extracted.
Sum of years digits (SYD) method: a higher charge in early years and a lower charge later, using falling fractions of the depreciable amount.
Annuity method: the asset's cost is treated as an investment earning interest. A fixed annual amount is written off, and it covers both depreciation and interest.
Sinking fund method: a fixed sum is charged to profit each year and invested outside the business, so cash is ready to replace the asset.
Insurance policy method: like the sinking fund method, but the yearly sum is paid as a premium on a policy. The policy pays out when the asset must be replaced.

In the sinking fund and insurance policy methods, the asset stays in the books at its original cost. The accumulated charge sits in a fund or policy account. This is the point examiners test most.

No method is allowed to be based on revenue earned from using the asset (para 65). Whatever method you choose must be applied consistently. It changes only if the expected pattern of consumption changes (paras 63 and 64). Such a change is treated as a change in an accounting estimate.

Key rules to remember

Machine hour rate: Rate per hour = (Cost − Residual value) ÷ Estimated total working hours Yearly depreciation = Rate per hour × Hours worked in the year; Use the hours actually worked in each year. Depreciation can be zero if the machine did not run.
Depletion: Depletion per unit = (Cost − Residual value) ÷ Estimated total quantity Yearly depletion = Rate per unit × Units extracted; Used for mines, quarries and oil wells. Cost includes the amount paid for the right to extract.
Sum of years digits: Sum of digits = n(n + 1) ÷ 2, where n is the life in years Depreciation for a year = (Years of life remaining at start of that year ÷ Sum of digits) × (Cost − Residual value); Year 1 uses n, year 2 uses n − 1, and so on. The fractions add up to 1.
Annuity method: Interest for the year = Rate × Opening book value of the asset Depreciation for the year = Annual annuity − Interest; The annual annuity is read from an annuity table or given in the question. Interest falls each year, so depreciation rises.
Sinking fund method: Yearly instalment = Amount needed for replacement ÷ Accumulation factor Fund balance = Instalments + Interest earned on fund investments; The accumulation factor comes from a table and is given in the question. The asset stays at cost.
Insurance policy method: Yearly charge = Annual premium paid Gain or loss on closing = Policy surrender or maturity value − Policy account balance; The premium is charged to the Profit and Loss Account each year. Any difference at the end is transferred to the asset replacement or profit side as the question directs.

How to solve Other Methods of Depreciation questions

Use this plan for any question on these methods. Read the method name first, because it decides everything that follows.

1Identify the method named in the question: machine hour, depletion, SYD, annuity, sinking fund or insurance policy.
2Write down the cost, residual value, life, hours or quantity, and any rate or table factor given.
3Compute the depreciable amount: Cost − Residual value. In annuity, sinking fund and insurance policy questions, check what the question says about the amount to be replaced.
4Apply the method's rule to find the charge for each year asked. Use the actual hours or units for that year, or the right SYD fraction.
5Check that the charge is sensible. Total depreciation must never exceed the depreciable amount.
6Pass the entries: Depreciation A/c Dr to Asset A/c (or to Sinking Fund A/c or Policy A/c), then transfer to the Profit and Loss Account.
7Show the closing book value of the asset, or the fund and investment balances, if the question asks for it.

Quickest way: Rate first, then multiply

When to use it: Use this for machine hour, depletion and SYD questions where you only need the charge for a given year.

Calculate the depreciable amount once: Cost − Residual value.
Divide by total hours, total units or the sum of digits to get a single rate or base.
Multiply the rate by the year's hours or units, or the year's SYD number, to get the charge.
Check the sum: for SYD, the fractions over the full life must total the depreciable amount.
For sinking fund and insurance policy, remember the asset stays at cost and only the fund or policy account grows.

Common mistakes in Other Methods of Depreciation

Using cost instead of cost less residual value as the base.
Students rush and forget that residual value is not depreciated.
Fix: Always write 'Depreciable amount = Cost − Residual value' as your first line.
In SYD, using the same fraction every year.
It is confused with straight line, where the charge is constant.
Fix: Start with the full life as the numerator in year 1, then reduce it by one each year. Make sure the numerators run n, n − 1, ... 1.
Reducing the asset's value in the books under the sinking fund or insurance policy method.
Students apply the straight-line habit of crediting the asset account.
Fix: Credit the Sinking Fund A/c or Policy A/c. The asset stays at original cost until it is replaced.
In the annuity method, charging the full annuity as depreciation.
Students forget that part of the annuity is interest on the asset's book value.
Fix: Depreciation = Annuity − Interest. Interest is calculated on the opening book value.
Charging depreciation in a year with no machine hours or no extraction.
Students apply a fixed yearly charge by habit.
Fix: For machine hour and depletion, the charge follows actual use. Zero use means a zero charge. AS 10 para 57 notes that under usage methods the charge can be zero when there is no production.
Basing depreciation on revenue or sales from the asset.
Students think income and use should move together.
Fix: AS 10 para 65 says a revenue-based depreciation method is not appropriate. Use hours, units or time instead.

Worked examples

Example 1

A machine costing ₹5,00,000 has an estimated residual value of ₹50,000 and a total expected working life of 90,000 hours. It runs 12,000 hours in year 1 and 15,000 hours in year 2. Find the depreciation for each year and the book value at the end of year 2 under the machine hour method.

Show the solution

Depreciable amount = ₹5,00,000 − ₹50,000 = ₹4,50,000.
Rate per hour = ₹4,50,000 ÷ 90,000 = ₹5.
Year 1 depreciation = 12,000 × ₹5 = ₹60,000.
Year 2 depreciation = 15,000 × ₹5 = ₹75,000.
Total depreciation = ₹60,000 + ₹75,000 = ₹1,35,000.
Book value at end of year 2 = ₹5,00,000 − ₹1,35,000 = ₹3,65,000.

Answer: Depreciation: ₹60,000 in year 1 and ₹75,000 in year 2. Book value at the end of year 2 is ₹3,65,000.

Example 2

Rao Traders buys equipment for ₹1,60,000. Its life is 5 years and its residual value is ₹10,000. Using the sum of years digits method, find the depreciation for the first three years and the book value at the end of year 3.

Show the solution

Depreciable amount = ₹1,60,000 − ₹10,000 = ₹1,50,000.
Sum of digits = 5 × 6 ÷ 2 = 15 (check: 5 + 4 + 3 + 2 + 1 = 15).
Year 1 = 5/15 × ₹1,50,000 = ₹50,000.
Year 2 = 4/15 × ₹1,50,000 = ₹40,000.
Year 3 = 3/15 × ₹1,50,000 = ₹30,000.
Total for three years = ₹50,000 + ₹40,000 + ₹30,000 = ₹1,20,000.
Book value at end of year 3 = ₹1,60,000 − ₹1,20,000 = ₹40,000.

Answer: Depreciation is ₹50,000, ₹40,000 and ₹30,000 for years 1 to 3. Book value at the end of year 3 is ₹40,000.

Exam tips

Write the method's formula first and plug in the numbers. Examiners give marks for the working even if the final figure is off.
For sinking fund and insurance policy questions, draw the asset account, the fund or policy account, and the investment account. Remember that the asset account remains at cost.
Check the total at the end. SYD fractions must add up to the whole depreciable amount. Machine hour and depletion charges must not exceed it.
In theory questions, state that the method should reflect the pattern of consumption of benefits (AS 10 para 62) and that revenue-based methods are not appropriate (para 65).
Rate tables and factors are always given in the question. Do not try to recall them. Just use them as stated.

Practice questions from Depreciation and Amortization

Other Methods of Depreciation: frequently asked questions

What are the other methods of depreciation besides straight line and WDV?

They are the annuity, depletion, machine hour, sum of years digits, insurance policy and sinking fund methods. Each suits a different type of asset or a different pattern of use. Mines suit depletion, machines suit machine hour, and replacement planning suits sinking fund or insurance policy.

What is the difference between the sinking fund method and the insurance policy method?

In both, the asset stays at cost and money is set aside for replacement. In the sinking fund method you invest the yearly instalment in securities and the interest earned is added to the fund. In the insurance policy method you pay a yearly premium to an insurer, and the policy's surrender or maturity value funds the replacement.

How is the annuity method different from the written down value method?

In the annuity method, the asset is treated as an investment earning interest on its book value. A fixed annual amount is written off, made up of interest and depreciation, so depreciation rises over the years. In the WDV method, a fixed percentage is charged on the reducing balance and the charge falls each year.

Can depreciation be based on the revenue the asset earns?

No. AS 10 para 65 says a method based on revenue generated by an activity that uses the asset is not appropriate. Revenue is affected by prices, sales and other factors that have nothing to do with how the asset is consumed.