SINKING FUND METHOD OF DEPRECIATION
The sinking fund method of depreciation is used when an organization wants to set aside a sufficient amount of cash to pay for a replacement asset when the current asset reaches the end of its useful life.
As depreciation is incurred, a matching amount of cash is invested, with the interest proceeds being deposited into an asset replacement fund. The interest deposited into this fund is also invested. By the time a replacement asset is needed, the funds needed to make the acquisition have accumulated in the associated fund.
More, The Sinking fund depreciation is also called a depreciation fund account. The amount generated through sinking fund depreciation is used to replace the asset when it needed.
In this amount, the charge is credited in the sinking fund account, which is shown on the liability side of the balance sheet and the asset value has its original value and is shown in the asset side of the balance sheet. The amount generated through the sinking fund is invested in marketable security at the end of the year.
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