Methods of Recording Depreciation Video Lecture - SSC CGL Tier 2 - Study

let's understand the accounting for
depreciation two methyls now first thing
which I think now you should be clear is
that depreciation is what an expense
okay so let's say for example there is
an asset which you bought for 100,000
and the depreciation you've charged on
that asset is 10,000 earlier okay for 10
years the question which comes up is how
will you do the accounting for this
depreciation I'm not dealing with the
cost of asset because that entry is
simple if it is a plant and machinery
you will debit the plant and machinery
account and credit the bank account what
we are dealing with here is the
depreciation so there are two methods
which are used to account for
depreciation in method 1 depreciation is
charged to asset account and in method 2
we create a provision for depreciation
right so let's understand what is the
difference between these two methods now
as I told you depreciation is an expense
so when you pass an entry for
depreciation you will debit the
depreciation account by how much you're
told that the depreciation is 10,000 per
month right but what you will credit you
are not paying any kind of cash when you
charge depreciation that is where these
two methods differ in method one the
depreciation is charged to the asset
account which means what asset account
would normally have what it will have a
debit balance so you then you or chase
an asset you pass an entry asset account
debit to Bank
in this case let's say it is 100,000
write it method one what you do is you
charge this depreciation directly to
this asset account so you have to reduce
the value of the asset right so you
credit the asset account by rupees
10,000 then this depreciation account
which is an expense is closed by
transferring it to the profit and loss
accounts you will debit the profit and
loss account to depreciation 10,000
right so method 1 depreciation is
charged with the asset account once
you're charged depreciation is just
transfer it to the profit and loss
account
how about method 2 or maybe less even
before I go to method 2 what will be the
position which is going to be reflected
in your financial statements so in your
financial statement when you show the
balance sheet okay in the asset side
what you will do is you will show the
asset and you will show it at 90
thousand which is this hundred thousand
minus the depreciation which has been
charged in year two let's say you again
charge ten thousand of depreciation then
you will show it at 80 thousand so the
only thing which is reflected is the net
value of the asset now coming to method
two which is creating a provision for
depreciation account what we do is when
we pass this entry for depreciation we
will debit depreciation expense on the
asset account we credit the provision
for depreciation account okay and just
like in case one this depreciation is
then transferred to the profit and loss
account so the only difference between
these two method insofar as accounting
is concerned is that in one case you
charge it to the asset account in second
you charge it to the provision for
depreciation account
but from a disclosure perspective or how
it comes in the balance sheet there's a
slight bit of a difference in this case
if you notice my asset account was
debited by one lakh
it has not been credited here so the
asset account value will remain at what
1 lakh 100000 right in this case I
showed it at 90 thousand which is the
net temple but in method 2 you will show
the asset at 1 lakh - provision for
depreciation 10,000 if you notice this
is a credit balance this is a debit
balance and then you will show 90,000 in
the how-to column now if you notice in
both the cases
the balance is 90,000 the only
difference is in terms of disclosure
what this method helps us or the method
to help trusses it tells you how much
was the original cost of the asset
how much depreciation you charged and
what is the net value in method 1 you
just know the net value you don't know
what was the original cost in case 1
right so that's all basically you do the
accounting for depreciation