Can new assets be purchased from provision for depreciation account

In general, the answer is no, new assets cannot be purchased directly from the Provision for Depreciation account.

Here's why:

  1. Provision for Depreciation is a contra-asset account, which means it is a negative account that offsets the value of an asset. Its purpose is to recognize the depreciation expense over the life of an asset, rather than the asset's original cost.
  2. Depreciation is an expense account, which is recorded as a debit to the Depreciation expense account and a credit to the Provision for Depreciation account. This reduces the carrying value of the asset over time.
  3. Assets are recorded at their original cost, which is typically done by debiting the Asset account (e.g., Equipment, Building, etc.) and crediting the Cash account.

When you purchase a new asset, you would typically:

  1. Record the purchase by debiting the Asset account (e.g., Equipment) and crediting the Cash account.
  2. Record the depreciation expense by debiting the Depreciation expense account and crediting the Provision for Depreciation account.

In summary, the Provision for Depreciation account is not a source of funds to purchase new assets. Instead, you would use the Cash account to purchase new assets and record the depreciation expense separately.

If you're wondering how to handle the purchase of a new asset when there's already a provision for depreciation account, here's a possible scenario:

Let's say you have an existing asset with a carrying value of $10,000, and you've already recorded $2,000 in depreciation expense (i.e., the Provision for Depreciation account has a balance of $2,000). You then purchase a new asset for $5,000.

To record the purchase, you would:

  1. Debit Equipment (Asset account) for $5,000
  2. Credit Cash for $5,000

To record the depreciation expense for the existing asset, you would:

  1. Debit Depreciation expense for $2,000
  2. Credit Provision for Depreciation for $2,000

The Provision for Depreciation account would still have a balance of $2,000, which would be used to record future depreciation expenses for the existing asset. The new asset would be recorded separately, with its own depreciation schedule.

I hope this clarifies things!