Recording depreciation

There are two ways to record depreciation in the books.

Method 1: charge it to the asset account. Each year: Depreciation A/c Dr, To Asset A/c. The asset account goes down every year and always shows the written down value.

Method 2: use a provision for depreciation account (also called accumulated depreciation). Each year: Depreciation A/c Dr, To Provision for Depreciation A/c. The asset account is left alone and stays at original cost. The provision account builds up year after year and has a credit balance.

Under both methods, at the year end the depreciation is closed to the profit and loss account: Profit and Loss A/c Dr, To Depreciation A/c.

In the balance sheet, method 2 shows the asset at cost less the total depreciation so far, so the reader sees both what was paid and how much has been written off.

Examples. Singhania and Bros.' plant cost ₹5,50,000 with a scrap value of ₹10,000 and a 10-year life: (5,50,000 − 10,000) ÷ 10 = ₹54,000 a year, so after three years the plant stands at 5,50,000 − 1,62,000 = ₹3,88,000. An asset costing ₹2,00,000 with scrap of ₹20,000 and a 10-year life is charged ₹18,000 a year; after 4 years the provision stands at ₹72,000.