Depreciation means a reduction in the value of assets which is a loss for the business. There are various causes of depreciation, like obsolescence, wear and tear, destruction, efflux of time, etc. All these factors influence the working life of assets and hence lead to a reduction in the value of assets over a period of time.
Adjustment:
The following treatment takes place in respect of Depreciation:
A. If Depreciation is given outside the trial balance:
In such a situation, two effects will take place:
- First, it will be shown in the Dr. side of the Profit & Loss A/c.
- Second, the amount of fixed assets appearing in the Balance Sheet would reduce by the amount of depreciation.
B. If Depreciation is given Inside the trial balance:
In such a case, it will be shown only on the Dr. side of the Profit & Loss A/c.
Illustration:
The following adjustments were noted:
1. Depreciation on the building is charged at 12.5%.
2. The value of Plant and Machinery is appreciated by 10%.
3. Further Bad Debts amounting to 2,000 and Provision to be created at 5% of debtors.