Sinking fund method of calculating depreciation

Question

Briefly describe the sinking fund method of calculating depreciation?

Answer 1

It is as well named as Depreciation fund method. Under this method a depreciation fund or sinking fund is created. Each year the loss and profit account is debited and fund account is credited by a sum that is computed such that the annual sum credited to the fund account that is accumulating through the life of the asset will be equivalent to the sum needed to replace the old asset. The main benefit of this method is that it adds interest or dividends by usual investment of cash outside the business.