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Difficulty: HardAccounting Treatment of Depreciation and Provision for Depreciation

Bello & Sons Traders purchased industrial equipment for ₦5,000,000 on 1 January 2023. Depreciation is charged at a rate of 20% per annum using the reducing balance method. Which of the following represents the correct accounting journal entry to record the depreciation expense for the financial year ended 31 December 2025?

  1. Debit Profit and Loss Account ₦640,000; Credit Provision for Depreciation Account ₦640,000Answer
  2. B
    Debit Provision for Depreciation Account ₦640,000; Credit Profit and Loss Account ₦640,000
  3. C
    Debit Profit and Loss Account ₦800,000; Credit Provision for Depreciation Account ₦800,000
  4. D
    Debit Profit and Loss Account ₦1,000,000; Credit Provision for Depreciation Account ₦1,000,000

Answer

Debit Profit and Loss Account ₦640,000; Credit Provision for Depreciation Account ₦640,000
The correct answer correctly determines the third-year depreciation under the reducing balance method. The Net Book Value at the beginning of 2025 is ₦3,200,000 (Cost of ₦5,000,000 less ₦1,000,000 for 2023 and ₦800,000 for 2024). Taking 20% of ₦3,200,000 yields ₦640,000. In accordance with double-entry principles, annual depreciation is charged by debiting the Profit and Loss Account (an expense) and crediting the Provision for Depreciation Account.

Step-by-Step Solution

1
Calculate depreciation for Year 1 (2023)
Depreciation for 2023 = 20% of ₦5,000,000 = ₦1,000,000. Net Book Value (NBV) at 31 Dec 2023 = ₦5,000,000 - ₦1,000,000 = ₦4,000,000.
Under the reducing balance method, annual depreciation is calculated as a fixed percentage of the carrying value (cost less accumulated depreciation).
2
Calculate depreciation for Year 2 (2024)
Depreciation for 2024 = 20% of ₦4,000,000 = ₦800,000. Accumulated depreciation at 31 Dec 2024 = ₦1,000,000 + ₦800,000 = ₦1,800,000. NBV at 31 Dec 2024 = ₦5,000,000 - ₦1,800,000 = ₦3,200,000.
The carrying value must be updated at the end of each period by deducting cumulative depreciation.
3
Calculate depreciation for Year 3 (2025)
Depreciation for 2025 = 20% of ₦3,200,000 = ₦640,000.
The depreciation charge for 2025 is 20% of the opening Net Book Value for 2025.
4
Formulate the accounting journal entry
Debit Profit and Loss Account ₦640,000; Credit Provision for Depreciation Account ₦640,000.
Depreciation is an operating expense (debit Profit & Loss) that increases the cumulative allowance account (credit Provision for Depreciation).

Key Concept

Accounting Treatment of Reducing Balance Depreciation and Journal Entries
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Topics

Accounting Treatment of Depreciation and Provision for Depreciation

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