Describe in detail two methods of recording depreciation. Also give the necessary journal entries.
In the books of account, there are two types of arrangements for recording depreciation on fixed assets: Charging depreciation to asset account and Creating Provision for depreciation/Accumulated depreciation account.
1. Charging Depreciation to Asset Account: According to this arrangement, depreciation is deducted from the depreciable cost of the asset (credited to the asset account) and charged (debited) to the profit and loss account. Under this method, the asset account is reduced by the depreciation amount each year.
The necessary journal entries are:
- For purchase of asset: Asset A/c Dr. To Bank/Vendor A/c
- At the end of the year: (a) For deducting depreciation from the asset cost: Depreciation A/c Dr. To Asset A/c (b) For charging depreciation to Profit & Loss: Profit & Loss A/c Dr. To Depreciation A/c
2. Creating Provision for Depreciation Account: Under this method, the asset account continues to appear at its original cost year after year over its entire life. Instead of being adjusted in the asset account, depreciation is accumulated on a separate account known as the Provision for Depreciation Account.
The necessary journal entries are:
- For purchase of asset: Asset A/c Dr. To Bank/Vendor A/c
- At the end of the year: (a) For crediting depreciation to provision account: Depreciation A/c Dr. To Provision for Depreciation A/c (b) For charging depreciation to Profit & Loss: Profit & Loss A/c Dr. To Depreciation A/c
Explanation
The answer distinguishes between the two primary methods of recording depreciation as outlined in the textbook (Section 7.8). The first method reduces the asset value directly, while the second method maintains the historical cost of the asset and accumulates depreciation in a contra-asset account. The journal entries are derived directly from the provided text chunks for both scenarios.