Depreciation
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.
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.
Financial Statement with Adjustment with Examples-III
Through adjustments in the financial statement, we consider all the accounting items which are relevant to the current financial year but not recorded in the books due to any reason or wrongly recorded. This helps us in getting the actual profit or loss for the year and the accurate financial position of the company. Five adjustments, such as Depreciation, Appreciation, Bad Debts, Provision for Bad & Doubtful Debts, and Bad Debts Recovered are discussed below: