What are the effects of depreciation on profit and loss account and balance sheet?
The effects of depreciation on the financial statements are as follows:
Effect on Profit and Loss Account: Depreciation is treated as a non-cash operating expense and is debited to the Profit and Loss Account. Since it is an expired cost, it is deducted from the gross profit to ascertain the true and fair profit or loss for the accounting period.
Effect on Balance Sheet: In the Balance Sheet, the fixed asset is shown at its original cost on the asset side. The total depreciation accumulated till date is maintained in a provision for depreciation account. This amount is shown either on the liabilities side of the Balance Sheet or by way of deduction from the original cost of the asset concerned on the asset side.
Explanation
The answer is derived directly from the textbook context provided. For the Profit and Loss Account, the text highlights that depreciation is an expired cost and non-cash operating expense charged to ascertain true profit. For the Balance Sheet, the text specifies that assets appear at original cost, while the depreciation is handled via a 'provision for depreciation account' shown on the liabilities side or deducted from the asset on the asset side.