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.
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)
Depreciation is charged by debiting Depreciation Account and crediting the Asset Account. The Depreciation is closed by transferring to Profit and Loss Account at the end of the year. The asset account appears in the Balance Sheet at its written down value that is, cost less depreciation at the end of the year.
Journal entries under this method are:
(2) Indirect Method (Provision for Depreciation Account is Maintained)
The amount of depreciation is debited to Depreciation Account and credited to Provision for Depreciation Account (or Accumulated Depreciation Account). The amount of depreciation is transferred to Profit and Loss Account at the end of the year. However, the Asset Account will appear at cost and the accumulated depreciation is either shown as a deduction from the asset or the same may be shown in the liability side of the Balance Sheet.
Journal entries under this method are:
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