What is Depreciation ?
Depreciation is defined as a permanent, gradual and continuous decrease in the value of fixed assets over its useful life due to wear and tear, passage of time or obsolescence. It is a non monetary expense and represents how much of an asset’s value has been used up.
Over time, the depreciation of an asset will build up – the total depreciation over a period of time is known as “accumulated depreciation”. The “book value” of an asset is calculated by deducting the accumulated depreciation from the original purchase price. The book value is what is reflected as the asset’s value on the balance sheet.
JOURNAL ENTRIES FOR DEPRECIATION
Journal entry for depreciation depends on whether the provision for depreciation/accumulated depreciation account is maintained or not.
When Accumulated Depreciation Account is not maintained.
- For Charging Depreciation –
Depreciation A/c Dr. …….
To Asset A/c Cr. ………
- To transfer Depreciation into P/L –
Profit and Loss A/c Dr. ………
To Depreciation A/c Cr. ………
FOR EXAMPLE :- A machinery is purchased for Rs 50,000. On this Machinery, depreciation is to be charged @ 10% on straight line basis. The journal entry to be passed will be –
Depreciation A/c Dr. Rs 5,000
To Machinery A/c Cr. Rs 5,000
(Being depreciation charged on the machinery)
Profit and Loss A/c Dr. Rs 5,000
To Depreciation on machinery A/c Cr. Rs 5,000
(Being depreciation expense transferred to the income statement)
When Accumulated Depreciation Account is maintained.
The Accumulated depreciation account also referred as ‘Contra Asset account’ which represents the total amount of depreciation that the company has expensed over time.
An accumulated depreciation journal entry is an end of the year journal entry used to add the current year depreciation expense to the existing accumulated depreciation account.
- For Charging Depreciation-
Depreciation A/c Dr. ……
To Provision for Depreciation A/c Cr. …….
- To Transfer Depreciation into P/L –
Profit and loss A/c Dr. ……
To Depreciation A/c Cr. …….
- To close the Provision Account
Provision for Depreciation A/c Dr. ……
To Asset A/c Cr . ………
***It must be noted that the Accumulated Depreciation appears either as a deduction from the asset or it may appear in the liability side of the Balance sheet.