A provision for depreciation is the amount written off for the wearing out of fixed assets.
There are two basic aspects of the provision for depreciation to remember,
- A depreciation charge (provision) is made in the profit and loss account in each accounting period for every depreciable fixed asset. Nearly all fixed assets are depreciable, the most important exceptions being freehold land and long term investments.
- The total accumulated depreciation on a fixed asset builds up as the asset gets older. Unlike a provision for doubtful debts, therefore, the total provision for depreciation is always getting larger, until the fixed asset is fully depreciated.
The similarly in the accounting treatment of the provision for doubtful debts and the provision for depreciation may become apparent.
The ledger accounting entries for the provision for depreciation are as follows.
- There is a provision for depreciation account for each separate category of fixed assets, for example land and building, furniture and fittings.
- The depreciation charge for an accounting period is a charge against profit. It is an increase in the provision for depreciation and is accounted as follows, with the depreciation charge for the period.
Profit and loss account-- Debit
Provision for depreciation account --Credit
- The balance on the provision for depreciation account is the total accumulated depreciation. This is always a credit balance brought forward in the ledger account for depreciation.
- The fixed asset accounts are unaffected by depreciation. Fixed assets are recorded in these accounts at cost or at their re valuated amount.
- In the balance sheet of the business, the total balance on the provision for depreciation account is set against the value of fixed asset accounts to derive the net book value of the fixed assets.