Learn On Your Own Accounting Entries For Provision For Depreciation:

In Accounting and taxation, provision for depreciation is a term used to describe an account wherein all amounts of depreciation deducted from different fixed assets are accumulated. It is credited with the amount of depreciation deducted from fixed assets every year.

Although the value of fixed assets declines over time due to wear and tear/usage, that decrease in the value is not deducted as depreciation from fixed assets rather they are accumulated in a reserve account named provision for depreciation account and is reflected in the financial statement of the concern. In the balance sheet, fixed assets are shown at their original purchase price.

Provision for depreciation is treated as liability for the concern because of the fact that the accumulated amount of depreciation of assets is yearly deducted from the profits of the concern and is credited into the reserve account. And this needs to be adjusted and the required adjustment is done either at the time of sale of an asset or at the end of its useful life.

When an asset is sold, the accumulated provision for depreciation of that particular asset is credited from the value of that asset and only then the asset will come down to its original book value till date. Now if the sale value if the asset is more than then the current book value, it be profit on sale of asset.

Likewise if an asset comes to the end of its useful life, the accumulated provision for depreciation of that particular asset is credited from the value of that asset and only then the asset will come down to its original book value till date. The Original cost of asset should now be equal to the total amount of provision of depreciation which is accumulated in provision for depreciation account. And on comparison, the original cost of asset with the provision value, the value of asset should become zero.

Here it is to be noted that, the accumulated amount of depreciation that was deducted from profit was credited to reserve account for this day. Now when the book value of the asset after deprecation has become zero, the entire amount from provision for depreciation account can be withdrawn to procure a new machine.