Depreciation Question:

It is also known as Depreciation fund method. Under this method a sinking fund or depreciation fund is created. Every year the profit and loss account is debited and fund account is credited with a sum, which is calculated such that the annual sum credited to the fund account which is accumulating throughout the life of the asset will be equal to the sum required to replace the old asset. The main advantage of this method is that it accumulates interest or dividends by regular investment of cash outside the business e.g.in securities to finance the replacement of the assets, which has become useless. But on the other hand this method has disadvantage also as the burden of profit and loss account goes on increasing as years pass by since the amount spent on repairs and maintenance goes on increasing due to the wear and tear of the asset and the amount of depreciation remains same.