to asset account (ii) Charging depreciation to provision for depreciation account. . . Charging depreciation to asset account Under this method at the end of every accounting period, the amount of depreciation charged is debited to depreciation account and the amount of depreciation is credited to asset account.
Hence the asset appears in the balance sheet at its depreciated value. Depreciation being revenue charge is transferred to profit and loss account. The following journal entries are to be passed in the books for depreciation and related transactions: (a) For purchase of asset Asset A/c To Bank A/c (b) For providing depreciation at the end of the accounting year Depreciation A/c To Asset A/c (c) For closing the depreciation account Profit and loss A/c To Depreciation A/c (d) For sale of asset Bank A/c Profit and loss* A/c To Asset A/c * Note : Profit and loss A/c will be credited if there is profit on sale. Accountancy Creating provision for depreciation account In this method, a provision for depreciation account is created.
The amount of depreciation charged every year is transferred to provision for depreciation account and not to asset account. Hence, asset account appears in the balance sheet at its original cost. Amount in the provision for depreciation account is shown on the liabilities side of the balance sheet under the head current liabilities and provisions. Depreciation for every year being nominal item is closed by debiting to profit and loss account of the respective year.
Example: Original cost of plant and machinery ` , Depreciation ` , Method : When provision for depreciation account is not created Balance sheet (extract) Liabilities Assets Plant and machinery , Less: Depreciation , , Method : When provision for depreciation account is created Balance sheet (extract) Liabilities Assets Provision for depreciation , Plant and machinery , The following journal entries are made under provision for depreciation account method: a) For purchase of asset Asset A/c Dr. To Bank A/c b) For providing depreciation at the end of the accounting year Depreciation A/c Dr. To Provision for