Provisions for Depreciation

A provision for depreciation is the amount written off due to wear and tear on fixed assets.

There are two basic aspects of the depreciation provision to remember,

o A charge (provision) is made in the profit and loss account in each accounting period for each depreciated asset.

Almost all assets depreciate, the most important exceptions being freehold land and long-term investments.

o Total accumulated depreciation accumulates as the asset ages. Unlike a provision for doubtful debts, therefore, the total provision for depreciation is always higher, until the fixed asset is fully depreciated.

The similarity in the accounting treatment of the provision for bad debts and the provision can be manifested.

The general ledger accounting entries for the provision for depreciation are as follows.

o There is a provision account for each separate category of assets, for example, land and buildings, furniture and fixtures.

o The depreciation charge for an accounting period is a charge against earnings. It is an increase in the provision for depreciation and is accounted for as follows, with the depreciation charge for the period.

Profit and loss account

Debit

Provision for depreciation account

Credit

o The balance of the depreciation provision account is the total accumulated depreciation. This is always an advanced credit balance in the ledger account for depreciation.

o Fixed asset accounts are not affected by depreciation. They are recorded in these accounts at cost or at their revalued value.

o On the company’s balance sheet, the total balance of the depreciation provision account is compared to the value of the asset accounts to obtain the net book value of fixed assets.