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Depreciation Notes

The document provides an overview of depreciation, including its definition, causes, and methods such as Straight-Line and Reducing Balance. It explains the Provision for Depreciation Account as a contra-asset used to track accumulated depreciation and outlines the accounting entries for charging depreciation and disposing of fixed assets. Additionally, it details the steps for asset disposal and the corresponding accounting entries for recording sale proceeds and any gains or losses.

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3 views3 pages

Depreciation Notes

The document provides an overview of depreciation, including its definition, causes, and methods such as Straight-Line and Reducing Balance. It explains the Provision for Depreciation Account as a contra-asset used to track accumulated depreciation and outlines the accounting entries for charging depreciation and disposing of fixed assets. Additionally, it details the steps for asset disposal and the corresponding accounting entries for recording sale proceeds and any gains or losses.

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sizibat
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

Notes on Depreciation, Provision for Depreciation & Disposal Accounts

1. Depreciation

Definition:

Depreciation is the systematic allocation of the cost of a tangible fixed asset over its useful life due to wear

and tear, obsolescence, or passage of time.

Causes:

- Wear and tear

- Obsolescence

- Time/usage

- Accidents/damage

Methods:

1. Straight-Line Method (SLM):

Depreciation = (Cost - Residual Value) / Useful Life

2. Reducing Balance Method:

Depreciation = Book Value x Rate

3. Units of Production / Machine Hour Method (Based on usage)

Accounting Entry (when charging depreciation):

Depreciation A/C Dr

To Asset A/C or Provision for Depreciation A/C

2. Provision for Depreciation Account

Definition:

A contra-asset account used to accumulate depreciation over time, keeping the asset account at original

cost.

Purpose:
Notes on Depreciation, Provision for Depreciation & Disposal Accounts

- To show original cost separately from accumulated depreciation

- Easier tracking of total depreciation

Accounting Entries:

When charging depreciation:

Depreciation A/C Dr

To Provision for Depreciation A/C

At year-end (transfer to P&L):

Profit & Loss A/C Dr

To Depreciation A/C

Balance Sheet Presentation:

Asset at cost

Less: Provision for Depreciation = Net Book Value

3. Disposal of Fixed Assets

Steps:

1. Transfer asset cost to Disposal Account:

Disposal A/C Dr

To Asset A/C

2. Transfer accumulated depreciation:

Provision for Depreciation A/C Dr

To Disposal A/C

3. Record sale proceeds:

Bank/Cash/Receivables A/C Dr

To Disposal A/C
Notes on Depreciation, Provision for Depreciation & Disposal Accounts

4. Record profit or loss:

- If credit side is greater than debit side (Gain):

Disposal A/C Dr

To Profit & Loss A/C

- If debit side is greater than credit side (Loss):

Profit & Loss A/C Dr

To Disposal A/C

Summary Table

Item | Debit | Credit

------------------------------|----------------------------------|-------------------------------

Depreciation | Depreciation A/C | Provision or Asset A/C

Provision for Depreciation | - | Accumulates depreciation

Disposal (asset removed) | Disposal A/C | Asset A/C

Disposal (depreciation) | Provision for Depreciation A/C | Disposal A/C

Disposal (sale proceeds) | Bank/Cash A/C | Disposal A/C

Disposal (loss/profit) | P&L or Disposal A/C | Disposal A/C or P&L

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