Hello friends! In this article, we will talk about depreciation accounting. Discuss the process and meaning of depreciation accounting. What are the methods to record depreciation transactions in accounting book? How to post accounting entries in Tally ERP 9?
We also discuss the difference between simple depreciation and provision for depreciation or accumulated depreciation.
When we think about the word depreciation, it's relate to decreasing the value of our business’s fixed assets. But practically why we charge depreciation on fixed assets? What are the reasons behind it? What are the effects of depreciation in our books?
In Depreciation Accounting Generally, we used to post accounting entries using following two methods-
(A) Straight Line Method / Fixed Installment Method (SLM)
(B) Reducing Balance Method/Written Down Value Method (WDV)
Today, we will discuss all these questions in our article. I will try to give you a clear solution to record depreciation in books of accounts with the help of Tally accounting software. Let's start!
Meaning of Depreciation-
Value reduction in fixed tangible assets of a business, due to any reason, is called depreciation.
Different types of fixed assets are used in the business such as plant and machinery, furniture and buildings etc. Business assets values or price are decrease in any financial period. This decremented value of assets are known as depreciation.
Major causes of Depreciation-
- Constant use of assets.
- Passes for a predetermined.
- Expiry of assets.
- Natural Effect.
Need for Charging Depreciation-
Depreciation is implemented in order to know the true position of profit loss in business, because the revenue expenditure matching concept of accounting tell us, that the amount related to any asset reduces the profit related to that particular accounting year.
Profit or loss should be known if the expenditure of the business has been recorded correctly. According to the concept of continuity, business expenditure related to a fixed asset, divided into all the accounting period. For how long it is estimated to get the benefit of it. Keeping in mind, you can charge depreciation on your business fixed assets.
Methods to Record the Depreciation-
1. Write off asset account for amount of depreciation or charging to asset account-
Depreciation A/c Dr.
To Asset A/c
2. Creating Provision for Depreciation/ Accumulated Account-
Depreciation A/c Dr.
To Provision for Depreciation A/c
In this method, the account of fixed assets not reduced. If you are using this method then your business assets are shown in balance sheet at initial cost.
When you charge depreciation on assets, depreciation amount get accumulated in provision for depreciation account. You can use provision or accumulated account amount as a fund and you may get benefit when you want to replace your asset.
When you want to sale your depreciated asset in future, provision for depreciation account comes in the picture and profit or loss get adjusted using this account.
As i discuss earlier, in this method, asset are shown in the balance sheet will be at the original cost of the asset. The provision for the depreciation account shown at the liability side of the balance sheet.
So if you want to learn depreciation accounting, then I suggest you please watch out our YouTube video on depreciation accounting in Hindi.
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