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Difficulty: MediumAccounting Treatment of Depreciation and Provision for Depreciation

A firm purchased motor vehicles costing ₦2,000,000₦2,000,000. As of 1 January 2024, the accumulated provision for depreciation on the vehicles was ₦400,000₦400,000. The business provides for depreciation at 20%20\% per annum using the reducing balance method. What is the correct double entry to record the annual depreciation expense for the year ended 31 December 2024?

  1. Debit Profit and Loss Account ₦320,000₦320,000; Credit Provision for Depreciation Account ₦320,000₦320,000Answer
  2. B
    Debit Provision for Depreciation Account ₦320,000₦320,000; Credit Profit and Loss Account ₦320,000₦320,000
  3. C
    Debit Profit and Loss Account ₦400,000₦400,000; Credit Provision for Depreciation Account ₦400,000₦400,000
  4. D
    Debit Motor Vehicles Account ₦320,000₦320,000; Credit Profit and Loss Account ₦320,000₦320,000

Answer

Debit Profit and Loss Account ₦320,000₦320,000 and Credit Provision for Depreciation Account ₦320,000₦320,000.
To record depreciation, the net book value at the beginning of the period (₦2,000,000−₦400,000=₦1,600,000₦2,000,000 - ₦400,000 = ₦1,600,000) must be multiplied by the depreciation rate of 20%20\%, giving ₦320,000₦320,000. The accounting entry requires debiting the Profit and Loss Account (to charge the expense) and crediting the Provision for Depreciation Account (to accumulate total depreciation).

Step-by-Step Solution

1
Calculate the Net Book Value (NBV) of the motor vehicles at the start of the year.
NBV=Cost−Accumulated Depreciation=₦2,000,000−₦400,000=₦1,600,000\text{NBV} = \text{Cost} - \text{Accumulated Depreciation} = ₦2,000,000 - ₦400,000 = ₦1,600,000.
Under the reducing balance method, depreciation is calculated on the net book value, not on original cost.
2
Compute the depreciation charge for the year ended 31 December 2024.
Depreciation Charge=20%×₦1,600,000=₦320,000\text{Depreciation Charge} = 20\% \times ₦1,600,000 = ₦320,000.
Applying the 20%20\% annual rate to the starting net book value yields the current year's expense.
3
Determine the correct double entry posting.
Debit Profit and Loss Account with ₦320,000₦320,000 and Credit Provision for Depreciation Account with ₦320,000₦320,000.
Depreciation is an expense charged to Profit and Loss, and the accumulated provision for depreciation account is increased by crediting it.

Key Concept

Accounting Treatment of Depreciation under Reducing Balance Method
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Topics

Accounting Treatment of Depreciation and Provision for Depreciation

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