Provision for depreciation on delivery van is charged to

Answer Details

Depreciation is the systematic allocation of the cost of a fixed asset over its useful life, reflecting the wearing out, obsolescence, or reduction in value of the asset as it is used in the business.

A delivery van is used to distribute goods to customers, so the cost of running and maintaining it, including depreciation, is a distribution or selling expense rather than a cost of manufacturing goods. The manufacturing account gathers only the costs of getting goods into a finished state, such as raw materials, direct labour, and factory overheads like depreciation on production machinery. The trading account is used to calculate gross profit from sales revenue and the cost of goods sold, so it does not carry expense items such as depreciation. The appropriation account deals with how net profit is shared, for example between partners or as tax and dividends, not with operating expenses.

Because depreciation on the delivery van is an operating expense connected with distributing goods rather than producing them or sharing profit, it is deducted in arriving at net profit, which is calculated in the profit and loss account.

Examination tip: to place depreciation correctly, identify what the asset is used for. Assets used in production belong in the manufacturing account; assets used in selling, distribution, or administration belong in the profit and loss account.