Basically, there are two (2) ways of recording depreciation:
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1 Depreciation Charge is recorded in Depreciation Account And Fixed Asset Account is credited with the depreciation amount. |
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Accounting entries as follows: Step 1: Debit: Depreciation Account Credit: Fixed Asset Account Being initial taking up the depreciation into a Depreciation account.
Step 2: At close of accounting period, Debit: Profit & Loss Account Credit: Depreciation Account Being Depreciation account being closed and transferred debit to Profit & Loss Account Income Statement: Depreciation Charge $XXX Balance Sheet: Fixed Assets (NET figure) $YYY Example: A machine $10,000 was bought on 1 st January 2005. Depreciation rate is 10% per year on cost. Following the above steps: Debit: Depreciation Account $1,000 Credit: Fixed Asset Account $1,000 Debit: Profit & Loss Account $1,000 Credit: Depreciation Account $1,000 Income Statement for Year ended 31st December 2005 Depreciation charged $1,000 Balance Sheet As At 31 st December 2005 Fixed Asset (net) $9,000 (One line only to show net fixed asset)
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2. PROVISION FOR DEPRECIATION ACCOUNT is opened for each type of asset. The depreciation amount is debited to the Profit and Loss Account and CREDITED to the Provision For Depreciation Account. THE FIXED ASSET ACCOUNT IS ALWAYS KEPT AT COST ( UNTOUCHED)
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Accounting Entries as follows: Debit Profit and Loss Account Credit: Provision for Depreciation Account Income Statement: Depreciation Charge $XXX Balance Sheet: Fixed Asset (Cost) $YYY Less: Provision for Depreciation ($YY)
Fixed Assets at Net Book Value $YYY Example: A machine $10,000 was bought on 1 st January 2005. Depreciation rate is 10% per year on cost. Following the above steps: Debit: Depreciation -Profit & Loss a/c $1,000 Credit: Provision For Depreciation a/c $1,000
Income Statement for Year ended 31st December 2005 Depreciation charged $1,000
Balance Sheet As At 31 st December 2005 Fixed Asset $10,000 Less: Provision for Depreciation ($1,000) Fixed Asset (Net Book Value) $9,000 |