How to put entries in depreciation & accumulated depreciation accounts?

geek84geek84 Trusted RegularPosts: 564MAAT
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.

Comments

  • MonsoonMonsoon Font Of All Knowledge Posts: 4,071FMAAT, AAT Licensed Accountant
    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!
  • geek84geek84 Trusted Regular Posts: 564MAAT
    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.
  • MonsoonMonsoon Font Of All Knowledge Posts: 4,071FMAAT, AAT Licensed Accountant
    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?
  • geek84geek84 Trusted Regular Posts: 564MAAT
    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!!
  • BeccaLouJ9BeccaLouJ9 Experienced Mentor DevonPosts: 1,024FMAAT
    I think the 'T' Monsoon refers to is Technician, (as in accounting technician) (I could be wrong!) xxx
  • MonsoonMonsoon Font Of All Knowledge Posts: 4,071FMAAT, AAT Licensed Accountant
    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 :D

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