Accounting Treatment: Recording Depreciation and Disposal of an Asset

Depreciation can be recorded in a business's books in either of two ways, and both are tested through journal entries and ledger accounts in AP Board Class 12 Commerce Accountancy examinations.

Method A — Charging depreciation directly to the Asset Account: the older, simpler approach.

Journal entry each year: Depreciation Account Dr; To Asset Account.

Here the Asset Account itself is credited with depreciation every year, so its balance — carried forward and shown in the Balance Sheet — is always the NET book value (original cost less all depreciation charged to date, blended into one figure). Once several years of depreciation have been posted, the asset's original cost can no longer be read off the account directly.

Method B — Creating a Provision for Depreciation Account (also called Accumulated Depreciation Account): the method more commonly used in practice today.

Journal entry each year: Depreciation Account Dr; To Provision for Depreciation Account.

Under this method, the Asset Account is NEVER credited for depreciation and continues to display the asset at its full ORIGINAL COST for as long as the business owns it. The Provision for Depreciation Account instead accumulates the running total of depreciation charged so far, and in the Balance Sheet the asset is shown at cost, LESS accumulated depreciation, arriving at exactly the same net figure that Method A would show directly. Method B is generally preferred because it keeps the asset's original cost permanently visible — useful for insurance valuation, internal audit, and for comparing against eventual sale proceeds — while still showing the accumulated depreciation as a clear, separate running total.

Sale (disposal) of an asset before the end of its useful life always follows the same three logical steps, whichever recording method was used: (1) charge depreciation on the asset up to its actual date of sale (proportionately, if sold partway through a year); (2) work out the asset's BOOK VALUE as on that date (cost less all depreciation charged to date); and (3) compare the sale proceeds against this book value — proceeds EXCEEDING book value give a PROFIT on sale, and book value EXCEEDING proceeds gives a LOSS on sale, in either case transferred to the Profit and Loss Account.

Under Method A, the sale proceeds are simply credited directly into the Asset Account, and the account is then balanced off — any debit balance left over is a loss on sale, any credit balance forced is a profit on sale. …