Provision for Depreciation

Provision for depreciation

Provision for depreciation

What is a provision for depreciation account?

• A provision for depreciation account for a non-current asset is used to record the depreciation for that asset

• It is important for a business to keep a record of both the following amounts:

  • The original cost of the non-current asset

  • The net book value of the non-current asset

• Therefore, a business will use two accounts for each type of non-current asset:

  • The non-current asset (at cost) account

    • Entries are only made in this account when non-current assets are purchased, sold or otherwise disposed of

  • The provision for depreciation of the non-current asset account

    • Depreciation charges are recorded here each year

• The net book value can be found by subtracting the balance of the provision for depreciation account from the balance of the non-current asset account

How do I record depreciation in the ledger accounts?

• No entries are made in the non-current asset account for depreciation

• The book of prime entry for depreciation is the journal

• To record the yearly depreciation at the end of the financial year:

  • Debit the income statement

    • This is because depreciation for the year is an expense

  • Credit the provision for depreciation account

• You can then balance the provision for depreciation account

  • The closing balance will be the total depreciation of the non-current asset

    • Not just the yearly charge

  • The opening balance will be brought down on the credit side

How do I record depreciation in the financial statements?

• The income statement only shows the depreciation charge for that financial year

  • This is listed under the expenses

  • This is the same amount as the credit entry made to the provision for depreciation account

• The statement of financial position shows three values labelled as:

  • Cost

    • This is the original cost of the non-current asset

    • This is the debit balance in the non-current asset account

  • Provision for depreciation

    • This is the total depreciation of the asset

    • This is the credit balance in the provision for depreciation account

    • This is the balance after the year’s depreciation has been entered

  • Net book value

    • This is the difference between the cost value and the provision for depreciation value