Accounting Treatment of Depreciation
Depreciation refers to decline or decrease in the value of fixed assets of the company and it is a non cash expense in the sense that no money goes out of the business due to this expense. We will look at the accounting treatment of depreciation in two statements that is profit and loss account and balance sheet –
In Profit and Loss Account
Since it is expenditure for the firm and therefore it will be debited in the profit and loss account which in turn will reduce the profit of the firm. Suppose depreciation on plant and machinery valued at $100000 comes to be $10000 then it this $10000 which will come under P & L account.
In Balance Sheet
In balance sheet the fixed asset will be shown after deducting the depreciation amount from that asset. Continuing with the above case of plant and machinery, in the balance sheet of the company it will be shown as $90000 ($100000 – $100000).