Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes: Double entry for Depreciation
- Once depreciation has been calculated using either:
- The straight line method or
- The reducing balance method
- It is recorded in the books using double entry
- Before we mention the entries it is important to state this
The old method of accounting for depreciation by recording it in the asset account is not acceptable
- Asset accounts should be recorded at cost i.e. they should only show the cost of the asset(s)
- An Accumulated Depreciation account must be used instead
- The following entries are used to record depreciation
Simple method
- This method requires only two entries:
- Debit the Profit and Loss Account with depreciation for the year
- Credit the Accumulated Depreciation Account with depreciation for the year
- This simple method is adequate at Ordinary Level
Comprehensive method
- At later levels and in the business world the following method is used to account for depreciation
- It involves three accounts:
- Provision for Depreciation Account which is an expense account used to record depreciation each period
- An Accumulated Depreciation Account used to show aggregated depreciation
- The Income Statement (Profit and Loss Account)
- The entries are two fold:
- First create the Provision for Depreciation expense:
- Dr Provision for Depreciation/Depreciation Expense with the depreciation expense for the year
- Cr the Accumulated Depreciation Account
- Then finally transfer the expense to the Income Statement:
- Dr Profit and Loss Account (Income Statement)
- Cr the Provision for Depreciation Account/Depreciation Expense Account
- First create the Provision for Depreciation expense:
Which should you use?
- You are strongly recommended to use the first simple method at Ordinary Level
- At Advanced Level the second method is to be preferred
To access more topics go to the Principles of Accounting Notes.