What is the Difference Between Depreciation and Provision for Depreciation?
🆚 Go to Comparative Table 🆚The main difference between depreciation and provision for depreciation lies in their purpose and accounting treatment.
Depreciation:
- Depreciation is the method of accounting for the reduction in the economic useful life of assets.
- It is the actual loss in value of a fixed asset over time.
- Depreciation is charged at the end of the accounting period.
- It is reported on the income statement as an expense.
Provision for Depreciation:
- Provision for depreciation is an advance calculation for depreciation.
- It is the portion of depreciation for a specific accounting period.
- It is the money set aside in order to eventually replace a fixed asset.
- Provision for depreciation maintains a credit balance, while depreciation maintains a debit balance.
In summary, depreciation is the actual loss in value of a fixed asset, while provision for depreciation is an anticipated loss in the value of an asset. Depreciation is charged at the end of the accounting period and reported on the income statement as an expense, whereas provision for depreciation is an advance calculation set aside to eventually replace a fixed asset.
Comparative Table: Depreciation vs Provision for Depreciation
Here is a table comparing the differences between depreciation and provision for depreciation:
| Concept | Depreciation | Provision for Depreciation |
|---|---|---|
| Definition | Depreciation is an accounting method used to allocate the cost of tangible assets over their economic life. | Provision for depreciation is the collected depreciation for assets. |
| Purpose | Charged at the end of the accounting period. | Represents the accumulated depreciation for a specific accounting period. |
| Accounting | Reduces the value of tangible assets on the balance sheet. | Accumulates depreciation charges in a designated account. |
| Reporting | Depreciation expense is reported on the income statement. | Accumulated depreciation is a running total of depreciation expense reported on the balance sheet. |
| Use | Helps in determining the decrease in the value of assets over time due to use, wear and tear, and obsolescence. | Allows the company's financial statements to accurately reflect the current value of its tangible assets. |
| Journal Entries | Debit depreciation expense, credit accumulated depreciation. | Debit provision for depreciation, credit cash for the collected depreciation. |
In summary, depreciation is the method of allocating the cost of tangible assets to compensate for their usage, while provision for depreciation refers to the charge of depreciation for a specific accounting period. Depreciation expense is reported on the income statement, whereas accumulated depreciation is a running total of depreciation expense reported on the balance sheet. A provision for depreciation account is used to accumulate depreciation that is provided against a fixed asset.
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