Depreciation is an important part of accounting and describes the process by which the values of fixed assets are reduced over a period of time. There are two basic methods of depreciation: direct and indirect.
Direct depreciation
In direct depreciation, the depreciation is recorded directly on the relevant asset account. The posting record for this is, for example: Depreciation / Machinery. The loss in value of the asset account is thus posted directly to expenses. This means that the book value or balance sheet value is always shown in the financial accounting.
Indirect depreciation
In the case of indirect depreciation, the depreciation is posted indirectly to a value adjustment account. These accounts are so-called "minus asset accounts". Here the posting record is, for example, depreciation / value adjustment machines. Since the value adjustment account is a minus asset account, the amount booked to it is deducted from the asset account machines. The great advantage of the indirect method is that the acquisition value of the asset and the accumulated depreciation are always visible.
Conclusion
The indirect as well as the direct depreciation method are essential parts of accounting. They serve to show the depreciation of assets correctly and to draw a realistic picture of the financial situation of a company.
