How to put entries in depreciation & accumulated depreciation accounts?
geek84
Registered Posts: 568 Epic contributor 🐘
Hi Folks
I am on level 3 and going through one of the Osborne text books - Sole Trader & Partnership Accounts.
I am stuck on chapter 9 - Accounting for capital transactions. I do not understand how & why these entries are made in the journal and corresponding depreciation & accumulated depreciation accounts. Also, I do not understand when to mae the DR a nd when to make the CR entries.
Could someone please be kind enough to explain the process to me.
Thanks in advance.
I am on level 3 and going through one of the Osborne text books - Sole Trader & Partnership Accounts.
I am stuck on chapter 9 - Accounting for capital transactions. I do not understand how & why these entries are made in the journal and corresponding depreciation & accumulated depreciation accounts. Also, I do not understand when to mae the DR a nd when to make the CR entries.
Could someone please be kind enough to explain the process to me.
Thanks in advance.
0
Comments
-
Ok, so depreciation is a way of showing the cost of an asset in the P&L over its estimated useful life.
So, when you buy an asset, you put it on the balance sheet - Debit Asset and Credit bank (or creditors, or loan, depending on how you bought it). You then move some of the cost over to the profit and loss every year - via the depreciation journal.
Why do you put in on the balance sheet as opposed to recording it as an expense? Because it costs a large amount of money ('large' is relative to the size of the business) and will last more than a year. Typically fixed assets will be motor vehicles, plant and machinery, and fixtures and fittings for premises. So it's not right to put the whole cost on the P&L for one accounting period - it needs to be shown as an expense 'as it is used.' This is what depn is.
In the P&L, an expense is a debit.
So, when you post depreciation, you have to Debit the P&L. The corresponding credit therefore is to the balance sheet - and it is to an account that 'lives with' the asset cost account - the Accumulated Depreciation account.
Typically, depreciation is posted once a year and for your studies you can assume this, unless the question tells you otherwise.
You calculate the depn, and then always Debit Depreciation Expense (P&L) and Credit Accumulated Depreciation in the Balance Sheet.
Hope that helps - not sure I've explained it brilliantly!0 -
Hi monsoon
Many thanks for your speedy reply.
I do understand the concept of depreciation & accumulated depreciation, but what I do get stuck on is when making the entries in the relevant accounts.
I don't quite understand when to make a DR and when to make a CR entry in the corresponding accounts - journal, depreciation, accumulated depreciation, etc.
I shall be grateful if you could be kind enough to explain that procedure.
Thanks in advance.0 -
Assuming it's an ordinary depreciation journal, it's always DR P&L (depreciation expense) and CR Balance Sheet (accumulated depn). A journal is the name for the adjustment that posts the depreciation to the ledgers.
When to do it: usually at year end, or sometimes month-end, depending on the organisation.
I'm not really sure I can add more than that. Any help?0 -
Hi Monsoon
Many thanks for your help.
By the way, why do you not like the term 'T' accounts? ... That was one of the terms I was introduced to when I started accounts!!0 -
I think the 'T' Monsoon refers to is Technician, (as in accounting technician) (I could be wrong!) xxx0
-
BeccaLouJ9 wrote: »I think the 'T' Monsoon refers to is Technician, (as in accounting technician) (I could be wrong!) xxx
I like T accounts, they are my friend :-)0
Categories
- All Categories
- 1.2K Books to buy and sell
- 2.3K General discussion
- 12.5K For AAT students
- 318 NEW! Qualifications 2022
- 161 General Qualifications 2022 discussion
- 11 AAT Level 2 Certificate in Accounting
- 56 AAT Level 3 Diploma in Accounting
- 87 AAT Level 4 Diploma in Professional Accounting
- 8.8K For accounting professionals
- 23 coronavirus (Covid-19)
- 272 VAT
- 92 Software
- 273 Tax
- 135 Bookkeeping
- 7.2K General accounting discussion
- 200 AAT member discussion
- 3.8K For everyone
- 38 AAT news and announcements
- 345 Feedback for AAT
- 2.8K Chat and off-topic discussion
- 582 Job postings
- 16 Who can benefit from AAT?
- 36 Where can AAT take me?
- 42 Getting started with AAT
- 26 Finding an AAT training provider
- 48 Distance learning and other ways to study AAT
- 25 Apprenticeships
- 66 AAT membership