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Provision for Depreciation

A Provision for Depreciation account is used to show the accumulating depreciation up to a specified date for a particular asset or a group of assets.  By keeping the charge for depreciation in a separate account, it avoids any entry of depreciation in the asset account. The asset must always be shown at cost on the balance sheet. The closing balance in the provision for depreciation account at the end of each accounting period is shown as a subtraction from the original cost or valuation of the asset to display its book value on financial statements which include the profit and loss statement and the balance sheet. The double entry is:

Debit the profit and loss account
Credit the provision for depreciation account

An example:
 A machine is bought for $20,000 and paid by cash on 1 January, 20XX. The reducing balance method is used to depreciate the machine at the rate of 20%. Following are the relevant accounts and their entries.

Machinery Account

Date Particulars Folio Amount  
Date Particulars Folio Amount
      $         $
20XX  



20XX


Jan 01 Cash
20,000
Dec 31 Balance c/d
20,000



20,000



20,000
20X1



20X1


Jan 01 Balance b/d
20,000
Dec 31 Balance c/d
20,000



20,000



20,000
20X2



20X2


Jan 01 Balance b/d
20,000
Dec 31 Balance c/d
20,000



20,000



20,000
20X3







Jan 01 Balance b/d
20,000




 

Provision for Depreciation (Machinery) Account

Date Particulars Folio Amount   Date Particulars Folio Amount
      $         $
20XX



20XX


Dec 31 Balance c/d
4,000
Dec 31 Profit & Loss
4,000



4,000



4,000
20X1



20X1







Jan 01 Balance b/d
4,000
Dec 31 Balance c/d
7,200
Dec 31 Profit & Loss
3,200



7,200



7,200
20X2



20X2







Jan 01 Balance b/d
7,200
Dec 31 Balance c/d
9,760
Dec 31 Profit & Loss
2,560



9,760



9,760





20X3      
          Jan 01 Balance b/d   9,760

 

 

Profit and Loss Account for the year ended 31 December,  ….

    $
20XX Depreciation 4,000
20X1 Depreciation 3,200
20X2 Depreciation 2,560

 

Balance Sheet


As at 31 December, 20XX

$ $
Machinery at cost 20,000
Less: Accumulated Depreciation 4,000 16,000

 

As at 31 December, 20X1
Machinery at cost 20,000
Less: Accumulated Depreciation 7,200 12,800

 

As at 31 December, 20X2
Machinery at cost 20,000
Less: Accumulated Depreciation 9,760 10,240

 

 

 

 

$

 

 

 

$

20XX

 

 

 

20XX

 

 

 

Jan 01

Cash

 

20,000

Dec 31

Balance c/d

 

20,000

 

 

 

20,000

 

 

 

20,000

20X1

 

 

 

20X1

 

 

 

Jan 01

Balance b/d

 

20,000

Dec 31

Balance c/d

 

20,000

 

 

 

20,000

 

 

 

20,000

20X2

 

 

 

20X2

 

 

 

Jan 01

Balance b/d

 

20,000

Dec 31

Balance c/d

 

20,000

 

 

 

20,000

 

 

 

20,000

20X3

 

 

 

 

 

 

 

Jan 01

Balance b/d

 

20,000

 

 

 

 

Last Updated (Saturday, 04 September 2010 03:40)