Depreciation in the trial balance

[maz1987]

I'm having difficulties seeing how trial balances balance when depreciation is taken into account.

Using the example of JK plc in the Core Reading (chapter 10), we are given the cost of plant & machinery and of premises (debits), and also their respective accumulated depreciations (credits).

However what is the balancing item in the debits column that balances with accumulated depreciation?

If the depreciation had been on different terms, the credits column would total to a different amount, but why would the debits column also total to the new different amount?

Thanks

 

[morrisja]

It's been a while since I've looked at this stuff.. but possibly this will be of some help.

When you do a set of accounts for the current year you will make a depreciation charge in the P&L. You will also reduce the Assets by the amount of depreciation. This is how the balance occurs now.

Looking backwards, if depreciation was different, we would have had different figures in the P&L for those years and this would reflect in our current retained profit balance/shareholders funds carried forward. So if depreciation was lower we'd have charged less depreciation to the P&L and carried more profit forward.

Another situation could be one where you change the basis of your depreciation in the current year. Possibly you decide that the previous basis does not reflect the actual depreciation of the assets, they're worth more than your current adjusted book value. If you write up the value of the assets you will have a gain in the P&L for this write up. Reverse would apply if they were overvalued.

 

[Simon James]

Don't forget that historic depreciation affects the retained earnings. If depreciation in the past was higher, profits would have been lower and so retained earnings would be lower (balancing it out).

 

[maz1987]

Thanks for the help. Following your words I kept trying to think of examples that would contradict it and began to realise the power of the dual aspect principle!