Recording Depreciation in Books of Accounts: 2 Methods

Here we detail about the two methods for recording depreciation in the books of accounts, i.e, (A) Charging Depreciation to Asset Account (B) Creating Provision for Depreciation Account or Accumulated Depreciation Account.

(A) Charging Depreciation to Asset Account (When Asset is Shown at Net Depreciated Value):

Under this method, depreciation is charged to respective assets account. It is credited in the respective asset account. Here, the asset is shown at its book value (i.e. original cost minus depreciation).

Under this method, following journal entries have to be passed:

(i) When asset is purchased:

Asset A/c Dr.

  To Bank /Cash/Supplier A/c

(ii) When depreciation is provided on the asset at the end of each year:

Depreciation A/c Dr.

  To Asset A/c

(iii) When depreciation is transferred to Profit and Loss Account:

Profit and Loss A/c Dr.

  To Depreciation A/c

(iv) When asset is sold:

(a) When sale proceeds are received:

Cash / Bank A/c Dr.

  To Asset A/c

(b) In case of gain on sale of an asset:

Asset A/c Dr.

  To Profit and Loss A/c

(c) In case of loss on sale of an asset:

Profit and Loss A/c Dr.

  To Asset A/c

Illustration 1. (Charging depreciation to asset account under SLM) ABC Ltd. purchased a second-hand Machinery on 1st January, 2006 for Rs 1,50,000 and spent Rs 10,000 on its erection. Shows the Machinery Account and Depreciation Account for  three years, if the accounts are closed on 31st December every year. The depreciation is to be charged @ 10% p.a. on Original Cost Method.

(B) Creating Provision for Depreciation Account (When Asset is Shown at its Original Cost):

Under this method, depreciation is not charged to respective assets account. It is credited to a separate account called ‘Provision for Depreciation Account’ or ‘Accumulated Depreciation Account’. Here the asset is shown at original cost in the balance sheet and the amount of accumulated depreciation is shown on the liabilities side of the balance sheet under the head ‘Current Liabilities and Provisions’.

Under this method following journal entries are passed:

(i) When asset is purchased:

Asset A/c Dr.

  To Bank / Cash/Supplier A/c

(ii) When depreciation is charged:

Depreciation A/c Dr.

  To Provision for Depreciation A/c

or

  To Accumulated Depreciation A/c

(iii) When depreciation is written off:

Profit and Loss A/c Dr.

  To Depreciation A/c

(iv) When the accumulated depreciation is transferred to asset account:

Provision for Depreciation A/c Dr.

  To Asset A/c

(v) When asset is sold:

(a) When sale proceeds are received:

Bank/ Cash A/c Dr.

  To Asset A/c

(b) In case of profit on sale of an asset:

Asset A/c Dr.

  To Profit and Loss A/c

(c) In case of loss on sale of asset:

Profit and Loss A/c Dr.

  To Asset A/c

Illustration 2. (Provision for Depreciation Account under SLM)

M/s ABC & Co. purchased a Machinery for Rs 8,00,000 on 1st July 2007 and spent Rs 25,000 towards carriage and installation of the machinery. The estimated life of Machinery is 8 years, and its scrap value is estimated to be Rs 15,000. The company charged depreciation on Original Cost Method by creating Provision for Depreciation Account, and closed the books on 31st December every year. Prepare Machinery Account and Provision for Depreciation Account for 3 years.