Depreciation in Trading, Profit And Loss Account And Balance Sheet
Treatment Of Depreciation in Trading, Profit And Loss Account And Balance Sheet

As an accountant or an accounting student, the term DEPRECIATION shouldn't be strange to you. In this post, we are going to be discussing on treatment of depreciation in Trading, profit and loss account and balance sheet. Before we proceed, we will first define depreciation.

Depreciation can be defined as the fall or reduction in the economic service potential of an asset as a result of wear, tear, usage, Obsolescence and inadequacy.

Depreciation in accounting is the systematic process of allocating the cost of an asset (Fixed assets) over its estimated useful life. Depreciable assets mainly fixed assets. Examples are Plant and machinery, motor van, furniture and fittings, land and building, etc.

Trading, profit and loss account are mainly prepared by traders. The main aim of preparing the trading account of a business is to ascertain the gross profit or gross loss over a given period of time usually one year while the aim of preparing the profit and loss account is ascertain the Net profit or Net loss of a business.

On the other hand, Balance sheet is a statement showing the assets, liabilities and equity of a business over a given period of time. We should not that balance is a statement not an account.

In depreciation, assets are depreciated to show the true or original value of assets. The value of depreciation is deducted from assets value, the result gives us the NETBOOK VALUE. The value of depreciation is posted to the profit and loss account as expenses.

WORKING EXAMPLE
The following transactions took place at Michaels PLC for the year ended 31 December, 2018.
Assets (cost)    Amount(N)
Land and Building   5000
Motor Vehicle       1000
Plant & machinery   5000
Furniture & Fitting 2000

Fixed assets are to be depreciated by 10% of Cost. You are required to calculate the depreciation and explain how they will be treated in Trading, profit and loss account and balance sheet.

Solution
a. For the first Assets:land and building
Cost = N5000
Depreciation = 10/100×5000 = N500
Netbook Value = Cost of assets - Depreciation
= N5000-N500= N4500

b. For the second Assets: Motor vehicle
Cost = N1000
Depreciation = 10/100×1000 = N100
Netbook Value = N1000-N100= N900

c. For the third Asset: Plant and Machinery
Cost = N5000
Depreciation = 10/100×5000 = N500
Netbook Value = N5000-N500= N4500

d. For the first Asset: Furnitures and Fittings
Cost = N2000
Depreciation = 10/100×2000 = N200
Netbook Value = N2000-N200= N1800

The Netbook Value (cost of asset minus depreciation) will be transferred to the balance sheet as the new cost of asset instead of the initial cost while the amount for depreciation (N500 for land and building, N100 for motor vehicle, N500 for plant and machinery, N200 for furniture and fittings) will be transferred to the debit side of the profit and loss account, it will fall under the expenses.

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