Depreciation is the wear and tear charges of using a fixed assets which are used for the purpose of production and to maintain the office infrastructure. Fixed assets includes plant and machinery, buildings, furniture and fixtures, vehicles etc. As we know that the value of the fixed assets never remain same. The value of fixed assets goes down as the time passes. A time comes when the fixed assets become useless or obsolete. The reduction in the value of fixed assets is called as depreciation.
Depreciation has got very important role while determining the actual profit of a business firm. Unless the reasonable amount of depreciation is not booked as expenditure during a financial year, the true pictures of financial position of firm can not be revealed. There are different methods of depreciation which are being followed by different firms as per the utilization of the fixed assets. Most popular depreciation method adopted by the business firms is, written down value method.
Depreciation is not a cash expenditure. A provisional entry is passed through journal voucher at the end of the financial year.
Accounting treatment of Depreciation
Debit:- Depreciation A/c
Credit:- Fixed Assets
(Give the name of a fixed assets which is being depreciated)
Note:- The value of fixed assets are shown after reducing the amount of depreciation.
Treatment of Depreciation Account in final accounts
The Depreciation is an indirect expenses and is shown in expenses column of Profit and Loss Account. It has seen in few cases that some fixed assets are directly related to the production, in that case the depreciation should be shown in expenses side of Trading Account. But it is very difficult to know the actual life of the asset and actual value of fixed asset, that is why the depreciation is shown in Profit and Loss Account.
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