How to put entries in depreciation & accumulated depreciation accounts?

geek84

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.

Monsoon

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!

geek84

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.

Monsoon

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?

geek84

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!!

BeccaLouJ9

I think the 'T' Monsoon refers to is Technician, (as in accounting technician) (I could be wrong!) xxx

Monsoon

BeccaLouJ9 wrote: »

I think the 'T' Monsoon refers to is Technician, (as in accounting technician) (I could be wrong!) xxx

No you're spot on

I like T accounts, they are my friend :-)