Principles of Accounting: 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:
  1. Debit the Profit and Loss Account with depreciation for the year
  2. 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:
    1. Dr Provision for Depreciation/Depreciation Expense with the depreciation expense for the year
    2. Cr the Accumulated Depreciation Account
  • Then finally transfer the expense to the Income Statement:
    1. Dr Profit and Loss Account (Income Statement)
    2. Cr the Provision for Depreciation Account/Depreciation Expense Account

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

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