What is a provision for depreciation account?

You must have knowledge of what depreciation is. Depreciation is the process of allocating the value of an asset over its useful life. It reduces the carrying value of the asset year by year till it is scraped.

It is an expense (expense of using the asset for business purposes) and it is charged to profit and loss account.

Depreciation can be reported in the financial statement in two ways:

1. Deduct depreciation from the asset account and show the asset at “depreciation less” value. See the journal entries below:

1. Maintain a provision for depreciation account and show the asset account at original cost. In this method, no entry is passed through the asset account. See the journal entries below:

Provision for depreciation account represents the collection of total depreciation till date on an asset. That’s why it is also called accumulated depreciation account. When an asset is sold, its accumulated depreciation is credited to the asset account. See the journal entry below:

It is shown on the liabilities side of the balance sheet. It is a nominal account because it is shown as an expense in the statement of profit or loss.

In case provision for depreciation account is not maintained then the balance sheet looks like this: