>> May 28, 2011
Provision for depreciation account is the liability of business. We accumulate all the depreciation in a reserve and its name is provision for depreciation. By making provision for depreciation account, we need not to credit depreciation in fixed asset's account. At the end of each accounting year, we show fixed asset at their original purchase value in the balance sheet.
When we sell the asset, we transfer its accumulated provision for depreciation in that asset's credit side from provision for depreciation account. After this, that asset will come on the current book value and then we compare it with the sale value of asset. If sale value of asset is more than current book value of asset after adjusting from provision for depreciation, it will be profit on sale of asset and profit and loss account will
be the debit in that asset's account.
If we do not sell the asset, we have to transfer all year's depreciation to provision for depreciation account and provision for depreciation account will show in the liability side. When any asset crosses to its working life, its total provision will transfer to that asset's credit side. Original cost of asset will equal to the total amount of provision of depreciation which we accumulate in provision for depreciation account. Now, when we compare original cost of asset with the provision value, our asset will become zero. Because deduction of profit is just in books but there is no outflow cash, it means we have all provision for depreciation in cash form in our wallet. So, take all the amount from provision for depreciation account and buy new machine.
Provision for Depreciation Account's Proforma