4. Accounting for Depreciation

Question 1

How is depreciation accounted for in the financial statements?

Answer 1

There are 3 accounts associated with an asset:
- a cost account (SOFP)
- a accumulated depreciation account (SOFP)
- a deprecation expense account (P&L)

The non-current asset cost accounts are unaffected by depreciation.

The balance on the accumulated depreciation account is the total accumulated depreciation. This is always a credit balance brought forward in the ledger account.

In the statement of financial position, the balance on the accumulated depreciation account is set against the non-current asset cost accounts to derive the carrying amount of the non-current assets.

The depreciation expense is the depreciation charged for hat period and is not carried forward into the next accounting period.

Question 2

What is the journal entry for depreciation?

Answer 2

Debit the depreciation expense in the P&L and credit accumulated depreciation in the SOFP