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The assets acquired in the business are continuously used. They will naturally be losing their utility, value and usefulness. In other words, there will be wear and tear. Loss in the value of assets due to its constant use is termed as depreciation. It is necessary that loss due to depreciation must be accounted for. Certain provisions should be made, so that the assets may be replaced without much financial problems.

Treatment in Final Accounts 

(i) If depreciation account appears in Trial balance. It will be posted to the debit side of profit and loss account only, as it is an item from Trial balance. (Items from Trial balance are posted only at one place). 

(ii) If depreciation is all item of adjustments. We shall first of all calculate the amount of depreciation on the specific assets at the given rate. An adjusting entry (mentioned as above) will be passed. Depreciation account will be transferred to the debit side of Profit and Loss account. It will also reduce the value of the concerned asset, so the value of asset will be shown at reduced price in the Balance sheet. Depreciation on furniture (mentioned in the above example) will be shown as under in the profit and loss account and Balance sheet.