Question

What is provision for depreciation and how to prepare ledger for it ?​

Answer 1

Answer:

The depreciation charged till that date appears in the provision for depreciation account, which is shown either on the “liabilities side” of the balance sheet or by way of deduction from the original cost of the asset concerned on the asset side of the balance sheet

Answer 2

The use of a provision for depreciation account is an improvement over the accounting treatment of depreciation discussed on “accounting treatment of depreciation” page. This account is used to accumulate depreciation that is provided against a fixed asset. If a provision for depreciation account is used, the accounting entries are made as follows:

One provision for depreciation account is opened for every fixed asset account. Thus if there is a motor vehicle account, there will be opened a “provision for depreciation on motor vehicle account”. Similarly, in respect of plant and machinery, there will be a “plant and machinery account” and also one “provision for depreciation on plant and machinery account”.
At the end of each financial year, we debit the depreciation expense account and credit the provision for depreciation (on relevant fixed asset account) with the amount of depreciation calculated for the year.
Dr. the depreciation expense account
Cr. the provision for depreciation on the relevant fixed asset
The balance in depreciation expense account is transferred to the profit and loss account at the end of the year.
The balance of the provision for depreciation account is carried forward to the next year. Note that the provision on depreciation account is not a nominal account, it is a part of the asset account. Also note that it will always show a credit balance and that its balance will increase each year. At any given time, the balance on provision for depreciation account represents the total accumulated depreciation that has been provided against the particular asset.
No entry is made in the fixed asset account in so far as the depreciation is concerned. This account will continue to show a debit equal to the cost of the fixed asset concerned. The only entries that will be made in the fixed asset account will be in respect of fresh purchases or sale of the asset concerned.
IF it is desired to find out the book value of the fixed asset, it is ascertained as follows:
Book value = Cost (per fixed asset account) – Accumulated depreciation (per provision for depreciation account)

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