Question

Describe in detail two methods of recording depreciation. Also give the necessary journal entries.

Answer 1

The two methods of recording depreciation are diagrammatically presented below.

1. Charging depreciation to Asset Account− Under this method, depreciation is directly credited to the asset account and no separate account is prepared for provision of depreciation. Under this method, the original cost of an asset and the total amount of depreciation cannot be determined from the Balance Sheet, as the Asset Account appears at its written down value.

Journal entries for depreciation are given below.

When depreciation is charged to Assets Account

Depreciation A/c		Dr.
	To Assets A/c
(Depreciation charged to Assets Account)

Closing of Depreciation Account

Profit and Loss A/c		Dr.
	To Depreciation A/c
(Depreciation transferred to Profit and Loss Account)

2. Creating Provision for Depreciation Account− Under this method, depreciation is not credited to the Assets Account; in fact, it is credited to the provision for Depreciation Account. At the year end, asset is shown at the original cost in the Balance Sheet and total depreciation up to the date of Balance Sheet is shown as Provision for Depreciation Account.

Journal entries for depreciation are:

Charging Depreciation

Depreciation A/c		Dr.
	To Provision for Depreciation A/c
(Depreciation charged)

Closing of Depreciation Account

Profit and Loss A/c		Dr.
	To Depreciation A/c
(Depreciation account is transferred to Profit and Loss Account)

When the asset is sold, the accumulated depreciation on that asset is credited to the Asset Account by passing the following Journal entry:

Provision for Depreciation A/c		Dr.
	To Asset A/c
(Accumulated depreciation transferred to Assets Account)