When depreciation on buildings is taken on the books, there are at least two methods of treatment, e.g.:

1. To reduce the amount of the Real Estate account by the amount of the depreciation.

2. To open a depreciation account (not a "depreciation fund"), which is credited with the amount of depreciation decided upon, the debit entry being made to Profit and Loss account when the property is finally sold.

The second is by far the better plan, for it conforms to the practice of having the Real Estate account show the actual cost, and it shows plainly the amount to be written off; it is clean bookkeeping. In drawing up a balance sheet, the amount of this depreciation should then show, not as a liability, but as a deduction from Real Estate:

Real Estate Cost...............................

$185,000

Less Allowance for Depreciation on

Buildings...................................

7,50O

Net Real Estate.............

$177,500