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provision for depriciation

Ehtesham (Accountant) (37 Points)

17 March 2010

Hi sir,

I am An senior account assistant.

Please explain me provision and give me one example.

Regds,

Ehtesham

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2 Replies

CA Priya (CS Final) (1049 Points)
Replied 27 March 2010

Provision of depreciation account is the account of provision of depreciation. First of all we should understand provision of depreciation .Provision of depreciation is the collected value of all depreciation .With making of this account we are not credited depreciation in asset account. But transfer every year depreciation to provision of depreciation account. Every year we adopt this procedure and when assets are sold we will transfer sold assets ‘total depreciation to credit side of asset account. For calculating correct profit or loss on fixed asset. This provision uses with any method of calculating depreciation.

There are following feature of provision for depreciation account

Fixed asset is made on its original cost and every year depreciation is not transfer to fixed asset account.

Provision of depreciation account is Conglomerated value of all old depreciation.

Entry of depreciation will change also

Depreciation account Debit
Provision for depreciation account credit

This system can be used both in straight line and diminishing method of providing depreciation.

Calculation of loss on sale is very important where is provision of depreciation account is kept.

Which we can calculate with following way

Cost of sale of fixed asset XXXX

Less total depreciation up to the date
Of sale XXXX
______________________________________________

Written Down Value of sold asset XXXX

Less Sale price XXXX

____________________________________________

Loss on sale of Asset XXXX

____________________________________________

This loss will show in the credit side of asset account

At the sale total depreciation on of sold asset from its purchasing will transfer from provision of depreciation account to fixed asset account , its journal entry will

Provision for depreciation account Debit
To fixed asset Account Credit

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Provision means an amount which is created from profits as a charge against profits.... It is created for a particular purpose and an amount so created has a certain level of certainity....

On the other hand, Reserves are just opposite to provisions... Reserves is an appropriation of profits. Its use is not restricted and the amount so created is purely uncertain i.e there is high degree of estimatiom....

for e.g.... Ms. Priya has very well explained...