Accounting for Depreciation

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In this article we will discuss the alternative methods to account for depreciation in the books of accounts. If you want to read about the concept of depreciation and why it is charged then you can head to this article.

There are two methods to record depreciation in the books of Accounts:

Method 1 – Charging the depreciation to the Asset account:
In this method the depreciation account is debited because depreciation is an expense and the Asset account is credited because the value of the assets gets reduced to the extent of depreciation. The amount of depreciation is then finally transferred to the profit and loss account as an item of Expenditure.

Journal entries under this method are as follows:

1. For recording purchase of asset:

Asset Account – Debit   (with the purchase cost of the asset)
To Vendor or Bank Account

2. For recording of depreciation at the end of every accounting period:

(a) For deducting depreciation amount from the cost of the asset (with the amount of depreciation)

Depreciation Account – Debit
To Asset Account

(b) For charging depreciation to profit and loss account (with the amount of depreciation)

Profit and Loss Account – Debit
To Depreciation Account

3. Treatment in the balance sheet:

Under this method the fixed assets appear at its net book value (that is cost less depreciation) on the asset side of the balance sheet and not at its original cost or historical cost.

Method 2 – Creating a Provision for Depreciation account or (Accumulated depreciation account):

Under this method the Asset account is maintained at historical cost and a separate “Provision for Depreciation Account” is opened. Instead of crediting the asset account every year for the amount of depreciation, the provision for depreciation account is credited with the amount of depreciation. Thus the total amount of depreciation year after the year gets accumulated in the provision for depreciation account. The balance of provision for depreciation account at the end of each year is shown on the asset side of the balance sheet by way of deduction from the asset concerned or in the liability side of the balance sheet. As a result the Asset remains at cost in the ledger and the annual depreciation is accumulated in the provision account instead of being adjusted into the asset account at the end of each accounting period.

Journal entries under this method are as follows:

1. For recording the purchase of the Asset:

Asset Account – Debit   (with the purchase cost of the asset)
To Vendor or Bank Account

2. Following journal entries are recorded at the end of each year:

(a) For crediting depreciation amount to Provision for Depreciation Account (with the amount of depreciation)

Depreciation Account – Debit
To Provision for Depreciation Account

(b) For charging depreciation to profit and loss account (with the amount of depreciation)

Profit and Loss Account – Debit
To Depreciation Account

3. Treatment in the balance sheet:
In the balance sheet, asset continues to appear at its original cost on the Asset side and the depreciation charged till date appears in the provision for depreciation account either on the liability side of the balance sheet or by way of deduction from the original cost of the Asset concerned on the Asset side of the balance sheet.

Watch the video to get an understanding in Hindi:

 

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