Provision of depreciation is the collected value of all depreciation .With making of this account we are not credited depreciation in asset account. But transfer every year depreciation to provision of depreciation account. Every year we adopt this procedure and when assets are sold we will transfer sold assets ‘total depreciation to credit side of asset account. For calculating correct profit or loss on fixed asset. This provision uses with any method of calculating depreciation.
Features of Provision for Depreciation Account
There are following feature of provision for depreciation account:
1. Fixed asset is made on its original cost and every year depreciation is not transfer to fixed asset account.
2. Provision of depreciation account is Conglomerated value of all old depreciation.
3. Entry of depreciation will change also
Depreciation account Debit
Provision for depreciation account credit
4. This system can be used both in straight line and diminishing method of providing depreciation.
5. Calculation of loss on sale is very important where is provision of depreciation account is kept.
Which we can calculate with following way
Cost of sale of fixed asset XXXX
Less total depreciation up to the date
Of sale XXXX
____________________________________________
Written Down Value of sold asset XXXX
Less Sale price XXXX
___________________________________________
Loss on sale of Asset XXXX
___________________________________________
• This loss will show in the credit side of asset account
• At the sale total depreciation on of sold asset from its purchasing will transfer from provision of depreciation account to fixed asset account , its journal entry will Provision for depreciation account Debit
To fixed asset Account Credit
Diminishing Balance Method of Providing Depreciation
Diminishing balance method of providing depreciation is very important from accounting point of view. In this method,
accountant calculates depreciation on the asset from which he deducts all previous depreciation from asset. So, every year amount of depreciation will go down.
For Example, Suppose we purchase a machinery at $ 50000 and if we fix 10 % depreciation on machinery with diminishing balance method, then first year depreciation will $ 5000 , next year will calculate depreciation $ 50000 - $ 5000 = $ 45000 X 10 % =$ 4500
Third year depreciation will apply on $ 45000 - $ 4500 = $ 40500
So, we calculate depreciation on written down value of asset so , its other name is written down method or reducing
value method.
Now we are seeing the value of depreciation is decreasing
Ist year = $ 5000
2nd year = $4500
3rd year = $ 4050
Benefit or Advantages of this Method
1. This is also very easy method.
2. This is very scientific method and provides logic that which asset is abolish due to spending of time at that portion
of depreciation is not included in asset.
3. Income tax officer prefers this method for assessment of business and professional income.
If we buy any asset after first year, we need not to calculate depreciation from beginning.
Disadvantages of this method
1. In this method we also ignore interest on capital which is used for purchasing such asset.
2. All new and old assets are mixed with each other, for an auditor, it is so difficult to differ among them.
3. It is difficult to calculate optimum rate of depreciation
But we can use following formula for calculating depreciation in W.D.V. method.
R = 1 – ( S/C) 1/n
R = rate of depreciation
S = S is scrape value
n = n is the working life of an asset
c = c is cost of asset