Annuity Method Of Depreciation

DEFINITION of 'Annuity Method Of Depreciation'

A method of depreciation centered around cost recovery and a constant rate of return upon any asset that is being depreciated. This method requires the determination of the internal rate of return (IRR) on the cash inflows and outflows of the asset. The IRR is then multiplied by the initial book value of the asset, and the result is subtracted from the cash flow for the period in order to find the actual amount of depreciation that can be taken.

BREAKING DOWN 'Annuity Method Of Depreciation'

The annuity method of depreciation is also commonly referred to as the compound interest method of depreciation. If the cash flow of the asset being depreciated is constant over the life of the asset, then this method is called the annuity method. However, the annuity method of depreciation is not endorsed by GAAP principles.

RELATED TERMS
  1. Double Declining Balance Depreciation ...

    One of two common methods a business uses to account for the ...
  2. Depreciation

    1. A method of allocating the cost of a tangible asset over its ...
  3. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax ...
  4. Accumulated Depreciation

    The cumulative depreciation of an asset up to a single point ...
  5. Unit of Production Method

    A depreciation procedure used for property that is not in continuous ...
  6. Appraisal Method Of Depreciation

    A form of depreciation calculation that is based upon appraisal ...
Related Articles
  1. Professionals

    Depreciation

    CFA Level 1 - Depreciation. Summarizes the methods of depreciation, including the sinking-fund approach, and their impact on financial statements, taxes and ratios.
  2. Professionals

    Types Of Depreciation

    These are types of depreciation that companies face.
  3. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  4. Professionals

    Depreciation Accounting

    CFA Level 1 - Depreciation Accounting. This sections covers depreciation accounting. Includes formulas and sample calculations for a few common methods of finding depreciation.
  5. Professionals

    Capital Cost Allowance And Depreciation

    Depreciation can be used as a tax deduction.
  6. Professionals

    Depreciation

    Depreciation
  7. Professionals

    Accelerated Depreciation

    CFA Level 1 - Accelerated Depreciation. Learn why some companies use accelerated depreciation and the calculations behind the sum-of-year and double-declining-balance methods.
  8. Professionals

    Internal Rate Of Return

    Find out how to use IRR to analyze capital budgeting projects.
  9. Fundamental Analysis

    Internal Rate Of Return: An Inside Look

    Use this method to choose which project or investment is right for you.
  10. Forex

    Understanding Internal Rate Of Return

    Internal rate of return, or IRR, is one of the most popular methods of evaluating potential projects. Learn more about this important metric.
RELATED FAQS
  1. What is the tax impact of calculating depreciation?

    Understand the tax implications of a company's depreciation. Learn how differences in accounting methods change the amount ... Read Answer >>
  2. What is the relationship between accumulated depreciation and depreciation expense?

    Understand the relationship between accumulated depreciation and depreciation expense. Learn how each one is accounted for ... Read Answer >>
  3. What are the different ways to calculate depreciation?

    Read about some of the different allowable methods of calculating depreciation expenses as allowed by generally accepted ... Read Answer >>
  4. What are the different ways to calculate depreciation for tangible assets?

    Learn what depreciation is and how to calculate it using the straight line method, declining balance method, and the sum-of-the ... Read Answer >>
  5. How is salvage value used in depreciation calculations?

    Learn how an asset's salvage value is subtracted from its initial cost to determine the amount by which an asset is depreciated ... Read Answer >>
  6. Is depreciation only used for tangible assets?

    Learn if tangible assets can be depreciated, as well as what other assets are eligible for depreciation so you can account ... Read Answer >>
Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center