ACCOUNTING FOR DEPRECIATION

1.0 INTRODUCTION

In Unit 3, we have learnt about the concept of depreciation and the various methods of providing for it. In this Unit we shall appreciate the accounting treatment for depreciation in the relevant books of accounts and the final accounts. The Unit also discusses causes of depreciation and how to account for fixed assets disposal in the books of accounts.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

1. explain causes of depreciation 
2. compute depreciation for different categories of fixed assets 
3. maintain accounting records for depreciation 
4. appreciate how to treat depreciation in the books of accounts. 

3.0 MAIN CONTENT

3.1 Accounting for Depreciation

3.2 Causes of Depreciation

Assets get depreciated as a result of some factors which are discussed below:

1. Wear and Tear: Constant use of fixed assets gets the asset worn or torn. Examples of these assets are plant and machinery, furniture and fixtures, etc.
    Exhaustion: An asset may get exhausted through utilization. Thisis the case with mineral mines, oil wells, etc. 
2.  Obsolescence: Some assets are discarded before they are worn out as a result of improvement in technology. Such loss as a  result of new innovations is referred to as loss on account of obsolescence. 
3. Efflux of Time: Certain assets get depreciated in their value with the passage of time. This is the case with leasehold properties, patents and copy rights. 
4. Accidents: An asset may meet an accident and, therefore, it may get depreciated in its value. 

SELF ASSESSMENT EXERCISE 1

1. Define asset in the context of this Unit. 
2.  Discuss any three causes of depreciation. 

3.2 Methods of Recording Depreciation

Depreciation can be recorded in the books of account using two different methods:

1.  Provision for Depreciation Account Method Under this method of accounting for depreciation, the amount of depreciation to be charged is debited to the profit and loss account and credited to the provision for depreciation account. The asset account appears at original cost. 
2.  Depreciation Account Method Under this method, the amount of depreciation is debited to the depreciation account and credited to the assets account. The asset account thus appears at net book value. The depreciation account is closed to the profit and loss account like any other item of expense. 

3.3 Disposal of Fixed Asset

Where a fixed asset is disposed, the amount realized from the sale of the asset should be credited to the Disposal account (if provision for depreciation account method is in use) or Asset account (if depreciation account method is in use). Depreciation for the period for which the asset has been used should be written off in the usual manner. Any balance in the Asset Disposal Account representing profit or loss on sale of the asset should be transferred to the Profit and Loss Account.

 CONCLUSION

This Unit has discussed the method of writing off the cost of fixed assets into the depreciation account of a reporting entity in order to ensure that correct profit/loss is determined to show the entity’s result of operations for a period ending. Correct amount of profit/loss can only be ascertained if all expenditures (recurrent and capital) that provide the income are fully accounted for in the relevant sections of the final accounts.

 SUMMARY

In this Unit, we have discussed causes of depreciation, methods of recording depreciation into the books of accounts and the accounting treatment of disposal fixed asset. Of note is that, depreciation is not charged for the purpose of replacing fixed asset, but as a means of charging the fair share of the asset cost to the profit and loss account, to show its extent of utilization in the course of generating income for the reporting entity