An allowance for depreciation is the amount written off for wear and tear on fixed assets.
There are two basic aspects of the allowance for depreciation to remember,
o A charge (provision) is made to the profit and loss account in each accounting period for each depreciated asset.
Almost all assets are depreciated, the major exceptions being freehold land and long-term investments.
o Total accumulated depreciation accumulates as the asset ages. Unlike a provision for doubtful debts, therefore, the total provision for depreciation is always higher, until the fixed asset is fully depreciated.
The similarity in the accounting treatment of the provision for bad debts and the provision can be manifested.
The general ledger accounting entries for the depreciation allowance are as follows.
o There is an allowance account for each separate category of assets, eg, land and buildings, furniture and fixtures.
o The depreciation charge for an accounting period is a charge against profits. It is an increase in the provision for depreciation and is accounted for as follows, with the depreciation charge for the period.
Profit and loss account
Debit
Provision for depreciation account
Credit
o The balance of the allowance for depreciation account is the total accumulated depreciation. This is always an advanced credit balance in the ledger account for depreciation.
o Fixed asset accounts are not affected by depreciation. They are recorded in these accounts at cost or at their revalued value.
o On the company’s balance sheet, the total balance of the depreciation allowance account is compared to the value of the asset accounts to obtain the net book value of fixed assets.