Methods of Recording Depreciation

Depreciation is an integral component of accounting. It stands to impact the preparation of accounts. The amount recorded under the head of depreciation ultimately impacts the amount shown as profit or loss in the statement of income. Hence, it is pertinent to study and make calculations for the same in a calculated manner, which ensures fair and accurate presentation of accounts. Let us study the methods of recording depreciation as per depreciation accounting.

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Methods of Depreciation Accounting

Usually, there are two methods of recording depreciation in depreciation accounting. They are as follows:

Direct Method (No Provision for Depreciation Account is Maintained)

You can charge depreciation by debiting the Depreciation Account and crediting the respective Asset Account. Further, close the Depreciation account by transferring the amount to the Profit and Loss Account at the end of the year. The asset account then appears in the Balance Sheet at its written down value that is, cost less depreciation at the end of the year.

Let’s take a look at the journal entries that must be recorded under this method of depreciation accounting

Recording Amount of Depreciation	Depreciation A/c – Dr. To Asset A/c
Closing Depreciation Account	Profit & Loss A/c – Dr. To Depreciation A/c
Purchase of an Asset	Asset A/c – Dr. To Bank A/c
Sale of an Asset (Disposal)	Bank A/c – Dr. To asset A/c
Transfer of Profit on Sale	Asset A/c – Dr. To Profit & Loss A/c
Transfer of Loss on Sale	Profit & Loss A/c – Dr. To Asset A/c

Indirect Method (Provision for Depreciation Account is Maintained)

You have to debit the amount of depreciation to the Depreciation Account and credit it to the Provision for Depreciation Account (or Accumulated Depreciation Account, if so maintained). The amount of depreciation is then trans­ferred to Profit and Loss Account at the end of the year. However, the Asset Account will appear at cost.

Further, the accumulated depreciation appears either shown as a deduction from the asset or the same may appear in the liability side of the Balance Sheet. Let’s take a look at the journal entries that are different from the direct method. The other entries will remain same.

Recording the Depreciation Amount	Depreciation A/c – Dr. To Provision for depreciation A/c
To Close Depreciation Account	Profit & loss A/c – Dr. To Depreciation A/c
To Close the Provision Account and Asset Account	Provision for depreciation A/c – Dr. To Asset A/c

Take note that the profit and loss on sale of the asset will remain the same.

Browse more Topics under Depreciation Provision And Reserves

• Depreciation and Causes of Depreciation
• Methods of Calculating Depreciation Amount
• Straight Line Method and Written Down: A Comparative Analysis
• Disposal of Asset and any Addition or Extension to the Existing Asset
• Need for Depreciation and Factors Affecting Amount of Depreciation
• Provisions
• Reserves
• Declining Charge Method
• Other Methods

Solved Question for You

Question: The cost of a machine is IR 1,000 and its depreciation is 10% p.a. show the entries to record the depreciation.

Answer –

Depreciation a/c	Dr.	100
To Machinery a/c			100
(Being depreciation charged on machinery @10% p.a.)
Profit and loss a/c	Dr.	100
To Depreciation a/c			100
(Being transfer of depreciation)

Q: What are the advantages of maintaining a Provision for depreciation account?

Ans: The advantages are as follows,

• The Asset continues to be recorded at historical cost. This important for continuity purpose.
• Provision for Depreciation ensures that the accumulated depreciation of every asset is easily available at all times.
• When fixed asset needs to be revalued it is easy, since they were maintained at historical cost.