Principles of Accounting: Double entry for Depreciation

////Principles of Accounting: Double entry for Depreciation

Principles of Accounting: Double entry for Depreciation

ZIMSEC O Level Principles of Accounts 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:
    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

To access more topics go to the Principles of Accounting Notes.

 

By |2017-08-26T07:39:09+00:00August 25th, 2017|Notes, Ordinary Level Notes, Principles of Accounts Notes|Comments Off on Principles of Accounting: Double entry for Depreciation

About the Author:

He holds an Honours in Accountancy degree from the University of Zimbabwe. He is passionate about technology and its practical application in today's world.
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