1. Chapter 27 Double entry records for depreciation

2. Learning objectives
After you have studied this chapter, you should be able to:
Incorporate depreciation calculations into the accounting records
Record the entries relating to disposal of non-current assets
Make depreciation entries using either a one-stage or a two-stage approach to recording depreciation

3. Recording depreciation
To record depreciation:
The asset is maintained at its cost in the ledger account.
Another ledger account is opened, to record the depreciation to date – the accumulated provision for depreciation account.
The depreciation charge for the year is debited to the profit and loss account.

4. Recording depreciation (Continued)
A business has a financial year end of 31 December. A computer is bought for £2,000 on 1 January It is to be depreciated at the rate of 20% using the reducing balance method.

5. Recording depreciation (Continued)

6. The disposal of a non-current asset
To remove a non-current asset from the books, the following entries are needed:
Transfer the cost price of the asset to an asset disposal account
Debit disposal account
Credit asset account
Transfer the depreciation charged on the asset to the disposal account
Debit accumulated depreciation account
Credit disposal account

7. The disposal of a non-current asset (continued)
Account for the amount received on disposal
Debit cash book
Credit disposal account
Transfer the difference on the disposal account to the profit and loss account.

8. A non-current asset sold at a profit

9. A non-current asset sold at a loss

10. Learning outcomes You should have now learnt:
That the method of showing depreciation in the asset account is now used only by some small organisations, and should be avoided
That non-current asset accounts should show only the cost. Depreciation is credited to an accumulated provision for depreciation account

11. Learning outcomes (Continued)
That when we sell a non-current asset, we must transfer both the cost and the accumulated depreciation to a separate disposal account
That it is very rare for the depreciation provided to have been accurate
That a profit on the disposal of a non-current asset is transferred to the credit of the profit and loss account

12. Learning outcomes (Continued)
That a loss on the disposal of a non-current asset is transferred to the debit of the profit and loss account
That there are two approaches which may be adopted when entering depreciation in the accounting books
That the approach you have learnt does so in one double entry and uses one ledger account for the accumulated provision for depreciation

13. Learning outcomes (Continued)
That the other, ‘two-stage’, approach uses two journal entries and two ledger accounts, one for the depreciation expense and the other to record the accumulated provision for depreciation
That there are a number of alternatives for the names of the depreciation accounts involved under these two approaches

14. Learning outcomes (Continued)
That the name ‘provision for depreciation’ is often used in place of ‘accumulated provision for depreciation’ in the statement of financial position account that shows the depreciation accumulated to date