Accountancy · Ch 7 — Depreciation, Provisions and Reserves
Charging Depreciation to Asset account
Charging Depreciation to Asset account
This method treats the asset account itself as the place where depreciation is accumulated. Instead of creating a separate "Accumulated Depreciation" or "Provision for Depreciation" account, the depreciation is directly subtracted from the asset's cost in its own ledger account. This means the asset account never shows its original purchase price after the first year; it always shows the net book value (original cost minus all depreciation charged to date).
The logic is straightforward: the asset is losing value each year, so we reduce its recorded value directly. The corresponding expense is then transferred to the Profit & Loss account to reflect the cost of using the asset during that period.
Journal Entries
The accounting treatment involves three distinct journal entries, one at the time of purchase and two at the end of every accounting year.
1. For recording the purchase of the asset
When the asset is first bought, the entry is the standard one for acquiring a fixed asset. The asset account is debited with its total cost (including purchase price, installation, freight, etc.), and the bank or vendor account is credited.
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Asset A/c | Dr. | [Total Cost] | ||
| To Bank / Vendor A/c | [Total Cost] | |||
| (Being asset purchased) |
2. At the end of every year
Two entries are passed at the close of each accounting period. The first entry records the deduction of depreciation from the asset. The second entry transfers this depreciation expense to the Profit & Loss account.
(a) For deducting depreciation amount from the cost of the asset
Depreciation is credited to the asset account, reducing its book value. The corresponding debit goes to a temporary account called "Depreciation A/c".
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Depreciation A/c | Dr. | [Amount of Depreciation] | ||
| To Asset A/c | [Amount of Depreciation] | |||
| (Being depreciation charged on asset) |
(b) For charging depreciation to profit and loss account
The Depreciation account is now closed by transferring its balance to the Profit & Loss account. This is the final step that recognises depreciation as an expense for the year.
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Profit & Loss A/c | Dr. | [Amount of Depreciation] | ||
| To Depreciation A/c | [Amount of Depreciation] | |||
| (Being depreciation transferred to P&L A/c) |
The net effect of these two year-end entries is that the asset's book value is reduced, and the Profit & Loss account is debited with the full depreciation expense. The Depreciation account itself has a zero balance at the end of the year.
Balance Sheet Treatment
Because the asset account is directly credited each year, its balance on the balance sheet date is its net book value (also called written down value). This is the original cost minus the total depreciation charged from the date of purchase up to the balance sheet date. …