First, let us understand the meaning of a provision of depreciation. It is nothing but the total collection of all the depreciation over the years. This account is not like a normal account but a contra asset account. It is also called accumulated depreciation. Annual depreciation charged is an expeRead more
First, let us understand the meaning of a provision of depreciation. It is nothing but the total collection of all the depreciation over the years. This account is not like a normal account but a contra asset account. It is also called accumulated depreciation.
Annual depreciation charged is an expense for the business and hence has a debit balance. Whereas provision for depreciation as a contra asset account has a credit balance.
The journal entry for provision for depreciation is
| Depreciation A/c ……….Dr | XXX | |
| To Provision for depreciation | XXX |
Explaining the credit nature of this account. As we know that the depreciation is an expense for the business hence as per modern rules “Debit all the expenses and losses and credit all incomes and gains” therefore it is debited whereas the provision of depreciation is contra account it has a credit balance as it reduces the value of assets. So according to modern rule, we know a decrease in assets has a credit balance, hence shown in a negative balance on the balance sheet under long-term assets.
With the preparation of this account, we do not credit depreciation in the asset account but transfer every year to the accumulated depreciation account, and when assets are disposed of or sold we credit the ‘total’ of the provision on depreciation to the credit of the asset account just to calculate the actual profit or loss on a sale of the asset.
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Journal entry for goods purchased by cheque The journal entry for goods purchased by cheque is as follows: In this journal entry, purchase account and bank account are involved. The explanation is given below. Explanation Purchase Whenever there is a purchase of goods, the purchase account is debiteRead more
Journal entry for goods purchased by cheque
The journal entry for goods purchased by cheque is as follows:
In this journal entry, purchase account and bank account are involved. The explanation is given below.
Explanation
Purchase
Whenever there is a purchase of goods, the purchase account is debited.
Goods refer to the items which an enterprise manufactures or purchases and sells to generate its business revenue.
If there is a purchase of any other item which does not satisfy the above definition of goods, then the purchase account is not involved.
For example, if stationery is purchased and the enterprise does not trade in stationery items, then the purchase account will not appear in the journal entry.
Payment by cheque
Payment by cheque means the payment amount will be deducted from the bank account balance. Hence, in the given journal entry, the bank account is involved.
The logic behind the debit and credit
The golden rules of accounting
Purchase is an expense hence it is a nominal account. The golden rule for nominal accounts is “Debit all expense and loss and credit all incomes and gains”
Hence, the purchase account is debited.
Bank is a real account and the golden rule of accounting for real accounts is, “Debit what comes in, credit what goes out”.
Hence, the bank account is credited as money is going out of the bank.
Modern rules of accounting
Purchase is an expense account, and expenses are debited when increased and credited when decreased.
Hence, the purchase account is debited here.
A bank account is an asset account. Asset accounts are debited in case of an increase and credited in case of a decrease. Hence, the bank account is credited here.
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