News Provision Of Depreciation Account
Provision of depreciation is the collected value of all depreciation .With making of this trace concern human relationship nosotros are non credited depreciation inwards property account. But transfer every twelvemonth depreciation to provision of depreciation account. Every twelvemonth nosotros adopt this physical care for too when assets are sold nosotros volition transfer sold assets ‘total depreciation to credit side of property account. For calculating right earnings or loss on fixed asset. This provision uses with whatsoever method of calculating depreciation.
Features of Provision for Depreciation Account
There are next characteristic of provision for depreciation account:
1. Fixed property is made on its master cost too every twelvemonth depreciation is non transfer to fixed property account.
2. Provision of depreciation trace concern human relationship is Conglomerated value of all sometime depreciation.
3. Entry of depreciation volition modify also
Depreciation trace concern human relationship Debit
Provision for depreciation trace concern human relationship credit
4. This organization tin hold upwards used both inwards conduct trace too diminishing method of providing depreciation.
5. Calculation of loss on sale is really of import where is provision of depreciation trace concern human relationship is kept.
Which nosotros tin calculate with next way
Cost of sale of fixed property XXXX
Less full depreciation upwards to the date
Of sale XXXX
____________________________________________
Written Down Value of sold property XXXX
Less Sale cost XXXX
___________________________________________
Loss on sale of Asset XXXX
___________________________________________
• This loss volition exhibit inwards the credit side of property account
• At the sale full depreciation on of sold property from its purchasing volition transfer from provision of depreciation trace concern human relationship to fixed property trace concern human relationship , its mag entry volition Provision for depreciation trace concern human relationship Debit
To fixed property Account Credit
Diminishing Balance Method of Providing Depreciation
Diminishing residual method of providing depreciation is really of import from accounting quest of view. In this method,
accountant calculates depreciation on the property from which he deducts all previous depreciation from asset. So, every twelvemonth sum of depreciation volition become down.
For Example, Suppose nosotros purchase a mechanism at $ 50000 too if nosotros cook 10 % depreciation on mechanism with diminishing residual method, too hence foremost twelvemonth depreciation volition $ 5000 , side past times side twelvemonth volition calculate depreciation $ 50000 - $ 5000 = $ 45000 X 10 % =$ 4500
Third twelvemonth depreciation volition apply on $ 45000 - $ 4500 = $ 40500
So, nosotros calculate depreciation on written downward value of property hence , its other bring upwards is written downward method or reducing
value method.
Now nosotros are seeing the value of depreciation is decreasing
Ist twelvemonth = $ 5000
2nd twelvemonth = $4500
3rd twelvemonth = $ 4050
Benefit or Advantages of this Method
1. This is besides really slow method.
2. This is really scientific method too provides logic that which property is abolish due to spending of fourth dimension at that portion
of depreciation is non included inwards asset.
3. Income taxation officeholder prefers this method for assessment of trace concern too professional person income.
If nosotros purchase whatsoever property later foremost year, nosotros ask non to calculate depreciation from beginning.
Disadvantages of this method
1. In this method nosotros besides ignore involvement on working capital missive of the alphabet which is used for purchasing such asset.
2. All novel too sometime assets are mixed with each other, for an auditor, it is hence hard to differ alongside them.
3. It is hard to calculate optimum charge per unit of measurement of depreciation
But nosotros tin purpose next formula for calculating depreciation inwards W.D.V. method.
R = ane – ( S/C) 1/n
R = charge per unit of measurement of depreciation
S = due south is scrape value
n = n is the working life of an asset
c = c is cost of asset