Depreciation – Accounts Based

For depreciation, started opening accounts are the weakness for most students. I see through them! And I can’t emphasize enough how you will need a good basic (if you want to improve, read the first few topics of any accounting textbook) to be really able to grasp opening accounts easily! So the double entry rule is the most basic skill (for the fact that the trial balance and balance sheet will have to be balanced were all thanks to double entry rule!)

I will start explaining from the start (you can skip if you want to), I hope this explanation will implant a seed into your memory!

Example:

On 1 January 2012, a business brought a motor vehicle for $ 40,000. The motor vehicle was depreciated at $5,000 per annum using the Straight Line Method.

Cash or Bank account

---

Fixed Assets account

 

 

Deciding the journal entries for Depreciation and Provision for Depreciation can be somewhat tricky.

If you could memorize the journal entries real hard, this will be it

Date	Particulars						Debit	Credit
1-Jan	Depreciation of Motor Vehicle						5,000
		Provision for Depreciation of Motor Vehicle						5,000

But if you think you can’t memorize, I will explain it more thoroughly.

First, if you remember that all expenses will falls in the debit side. Check the trial balance to confirm.

Second, the word depreciation means expense, and therefore, it lies in the debit entry. See the journal entry above and refer to the definition previously posted on depreciation.

Third, the double entry account. If you refer to the motor vehicle account earlier, you will know that depreciation will reduce the amount of your fixed assets, and this is opened in another account named Provision for Depreciation. The Motor Vehicle account is not to be reduced because you will need to show the original cost of the asset at the Balance Sheet, and a separate amount to show the total amount of depreciation charged towards the assets.

So the general format for depreciation account,

Depreciation A/C
Provision for Depreciation			XXX	Profit and Loss			XXX

and provision for depreciation account,

Provision for Depreciation A/C
First year depreciation.
Balance c/d			XXX	Depreciation			XXX
Second year depreciation.
Balance c/d			XXX	Balance b/d			XXX
				Depreciation			XXX
			XXX				XXX

Whilst in the final account,  profit and loss account

Profit and Loss Account for the year ended … (vertical format)
Expenses:
Depreciation of fixed assets (FROM DEPRECIATION A/C)							XXX

and balance sheet,

Balance Sheet as at … (vertical format)
Fixed Assets:					Cost	Agg Depr	NBV
Motor Vehicle (FROM PROV of DEPRECIATION A/C)					XXX	(XXX)	XXX
							XXX

Next post will be on disposal account.