Accounting Treatment — Charging Depreciation Directly to the Asset Account

Having calculated the amount of depreciation, the next question is how to record it in the books. There are two accepted approaches; this section covers the simpler and more commonly used one first — charging depreciation directly to the Asset Account.

The journal entries.

1. On purchase of the asset:

   Asset A/c ...Dr

   To Bank/Vendor A/c

   (Being the asset purchased)

2. At the end of each accounting year, to record depreciation:

   Depreciation A/c ...Dr

   To Asset A/c

   (Being depreciation charged on the asset for the year)

3. To close the Depreciation Account by transferring it to the Profit and Loss Account:

   Profit and Loss A/c ...Dr

   To Depreciation A/c

   (Being depreciation transferred to Profit and Loss Account)

Effect on the Asset Account. Because the second entry credits the Asset Account directly, the asset's own account shows its book value falling, year on year, by the amount of depreciation charged — the closing balance carried down each year is the asset's book value as on that date, and this is the figure that appears in the Balance Sheet.

A simple example — the pattern of the Asset Account. If a machine is purchased for ₹1,00,000 and depreciation of ₹10,000 a year is charged, the Machinery Account for the first year would read: