Provision for Depreciation (Cambridge (CIE) O Level Accounting)
Revision Note
Written by: Dan Finlay
Reviewed by: Lucy Kirkham
Provision for Depreciation
What is a provision for depreciation account?
A provision for depreciation account for a non-current asset is used to record the depreciation for that asset
It is important for a business to keep a record of both the following amounts:
The original cost of the non-current asset
The net book value of the non-current asset
Therefore, a business will use two accounts for each type of non-current asset:
The non-current asset (at cost) account
Entries are only made in this account when non-current assets are purchased, sold or otherwise disposed of
The provision for depreciation of the non-current asset account
Depreciation charges are recorded here each year
The net book value can be found by subtracting the balance of the provision for depreciation account from the balance of the non-current asset account
How do I record depreciation in the ledger accounts?
No entries are made in the non-current asset account for depreciation
The book of prime entry for depreciation is the journal
To record the yearly depreciation at the end of the financial year:
Debit the income statement
This is because depreciation for the year is an expense
Credit the provision for depreciation account
You can then balance the provision for depreciation account
The closing balance will be the total depreciation of the non-current asset
Not just the yearly charge
The opening balance will be brought down on the credit side
How do I record depreciation in the financial statements?
The income statement only shows the depreciation charge for that financial year
This is listed under the expenses
This is the same amount as the credit entry made to the provision for depreciation account
The statement of financial position shows three values labelled as:
Cost
This is the original cost of the non-current asset
This is the debit balance in the non-current asset account
Provision for depreciation
This is the total depreciation of the asset
This is the credit balance in the provision for depreciation account
This is the balance after the year’s depreciation has been entered
Net book value
This is the difference between the cost value and the provision for depreciation value
Examiner Tips and Tricks
It can help to think of the provision for depreciation account as a copy of the non-current asset account. This helps to understand why the entry is on the credit side, as it is reducing the value of an asset.
Be very careful that you only enter the amount of depreciation for that year, not the total depreciation to date.
Worked Example
Katrina is a sole trader. Katrina charges depreciation at 20% per annum using the reducing balance method. Below are balances at 1 March 2023.
$ | |
Equipment | 20 000 |
Provision for depreciation on equipment | 4 000 |
Katrina also purchased additional equipment on 1 December 2023 for $5 000 by bank transfer. Katrina charges a full year’s depreciation in the year the equipment is purchased.
Prepare Katrina’s equipment account and provision for depreciation on equipment account for the year ended 29 February 2024. Balance the accounts at 29 February 2024 and bring down the balances at 1 March 2024.
Answer
Start with the equipment account.
Enter the balance of $20 000 as the opening balance on the debit side as it is an asset account
Enter the $5 000 for the additional equipment on the debit side
Do not enter any depreciation
Balance the account and bring down the new balance
Katrina
Equipment Account
Date | Details | $ | Date | Details | $ |
2023 Mar 1 |
Balance b/d |
20 000 | 2024 Feb 29 |
Balance c/d |
25 000 |
Dec 1 | Bank | 5 000 |
| ||
25 000 | 25 000 | ||||
2024 Mar 1 |
Balance b/d |
25 000 |
Next complete the provision for depreciation account.
Enter the balance of $4 000 on the credit side as it is the reduction of an asset
The equipment can be combined as a full year’s worth of depreciation is charged on the new equipment
Find the total cost of the equipment
$20 000 + $5 000 = $25 000
Subtract the provision for depreciation to find the net book value before charging that year’s depreciation
$25 000 - $4 000 = $21 000
Find 20% of the net book value to calculate the depreciation charge
20% ✕ $21 000 = $4 200
Enter this on the credit side of the provision for depreciation account with the label “income statement”
Balance the account and bring down the new balance
Katrina
Provision for Depreciation on Equipment Account
Date | Details | $ | Date | Details | $ |
2024 Feb 29 |
Balance c/d |
8 200 | 2023 Mar 1 |
Balance b/d |
4 000 |
| 2024 Feb 29 |
Income Statement |
4 200 | ||
8 200 | 8 200 | ||||
2024 Mar 1 |
Balance b/d |
8 200 |
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