Provision for depreciation account format

The standard format

1. Credit: depreciation charge for each year
2. Balance c/d: accumulated depreciation to date
3. Balance b/d: brought forward each year
4. On disposal: transfer accumulated depreciation to the disposal account

Filled example

Notes

• The asset account itself stays at cost; this account holds the depreciation.
• Carrying amount is cost less the balance on this account.
• On disposal, the relevant accumulated depreciation is transferred out.

Building and reading this format

The provision for depreciation account keeps a running total of all the depreciation charged on a class of assets. The asset account stays at cost, so a reader can always see what the business paid. This account sits beside it and builds up the wear and tear year by year.

It has a credit balance. It grows on the credit side and reduces on the debit side. That one fact explains the whole layout.

Each year, when depreciation is charged, debit the income statement (or a depreciation expense account) and credit the provision account. If machinery is depreciated by RM6,000 in the first year, RM6,000 goes on the credit side.

In the second year another RM6,000 is credited, and the account shows RM12,000 accumulated depreciation. The balance is carried down at each year end and brought down as the opening figure for the next year.

The debit side is used only when an asset is sold. If a machine with RM9,000 of accumulated depreciation is sold, remove that RM9,000 by debiting the provision account and crediting the disposal account.

The provision should hold depreciation only on assets the business still owns. Leaving in the depreciation of a sold asset overstates the total and distorts the carrying amount.

The closing balance is the figure shown in the statement of financial position as accumulated depreciation. If machinery cost RM40,000 and the provision account shows RM15,000, the carrying amount (net book value) is RM25,000.

Comparing the yearly credits shows the pace of depreciation. A debit entry shows that an asset was sold during the year.

Marks are mostly lost on direction and separation. Charging depreciation to the debit side reverses the account. Not removing depreciation on disposal leaves the account overstated and the disposal account short of a figure.

Mixing cost into this account, or netting depreciation straight against the asset account, loses marks too. Because the closing balance is a credit balance, it is carried down on the debit side and brought down on the credit side. Students often reverse this.

The routine is: credit the annual charge, debit any disposal, then balance the account and carry the closing figure down. Keep cost in the asset account and accumulated depreciation here.

If depreciation accounts and the carrying amount keep tangling in your answers, one of our teachers can work through a few multi-year examples with you step by step. Book a trial class

Related how-to

• How to calculate depreciation (straight-line method)
• How to calculate depreciation (reducing balance method)

These formats are standard accounting practice with our own figures. Check your board's exact requirements on the exam boards page.