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Depreciation Account

 
This method is designed to accumulate the depreciation provided on an asset in a separate account generally called ‘depreciation provision’ or ‘accumulated depreciation’.

Such accumulation of depreciation enables that the asset account need not be disturbed in any way and it continues to be shown at its original cost over the successive years of its useful life.

Some basic characteristic of this method of recording depreciation are:
  • Asset account continues to appear at its original cost year after year over its entire life;
  • Depreciation is accumulated on a separate account instead of being adjusted into the asset account at the end of each accounting period.
The following journal entries are recorded under this method:
 

1. For recording purchase of asset                              (only in the year of purchase)

Asset A/c Dr.                                                        (with the cost of asset including

                                                                              installation, expenses etc.)

To Bank/Vendor A/c                                                       (cash/credit purchase)
 

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

 (a) For crediting depreciation amount to provision for depreciation account

     Depreciation A/c Dr.                                              (with the amount of depreciation)

      To Provision for depreciation A/c

(b) For charging depreciation to profit and loss account

   Profit & Loss A/c Dr.                                            (with the amount of depreciation)

  To Depreciation A/c
 

3. Balance sheet treatment

In the balance sheet, the fixed asset continues to appear at its original cost on the asset side. The depreciation charged till that date appears in the provision for depreciation account, which is shown either on the “liabilities 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.


Example:
M/s Singhania and Bros. purchased a plant for Rs. 5, 00,000 on April, 01 2002, and spent Rs. 50,000 for its installation. The salvage value of the plant after its useful life of 10 years is estimated to be Rs. 10,000. Record journal entries for the year 2002-03 and draw up Plant Account and Depreciation Account for first three years given that the depreciation is charged using straight line method if:
  1. The books of account close on March 31 every year; and
  2. The firm charges depreciation to the asset account.
Solution

Date

Particulars

L.F.

Debit

Amount

Rs.

Credit

Amount

Rs.

2002

Apr. 01

 

 

Apr. 01

 

 


2003


Mar. 31

 

 


Mar.31

 

 

Plant A/c Dr.

To Bank A/c

(Purchased plant for Rs. 5,00,000)

Plant A/c Dr. 50,000

To Bank A/c 50,000

(Expenses incurred on installation)




Depreciation A/c Dr. 54,000

To Plant A/c 54,000

(Depreciation charged on asset)


Profit and Loss A/c Dr. 54,000

To Depreciation A/c 54,000

(Depreciation debited to profit and loss account)

 

 

5,00,000

 

 

50,000

 

 

 



54,000

 

 


54,000

 

 

5,00,000

 

 

50,000

 

 

 



54,000

 

 


54,000


Plant Account

Dr.             Cr.

Date

Particulars

J.F.

Amount

Rs.

Date

Particulars

J.F.

Amount

Rs.

2002

Apr. 01

 

 

 

 

 

2003

Apr. 01

 

 

 

 

2004

Apr. 01

2005

 

 

 

Apr. 1

 

 

Bank

Bank

(Installation

expenses)

 

 

 

Balance b/d

 

 

 

 

 

Balance b/d

 

 

 

 

Balance b/d 3,88,000

 

 

5,00,000

50,000


________

5,50,000

________

 

4,96,000
 

________

4,96,000

________

 

4,42,000

_______

4,42,000

________

 

3,88,000

2003

Mar. 31

 

 

 

 

 

 

2004

Mar. 31

 

 

 

2005

Mar 31

 

Depreciation Balance c/d

 

 

 

 

 

Depreciation
Balance c/d

 

 

 

Depreciation

Balance c/d

 



4,96,000

 

_______

5,50,000 _______

 

54,000

4,42,000
_______

4,96,000

_______
54,000

3,88,000

_______

4,42,000

_______





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