Depreciation Expense Journal Entry Example

Even if you’re using accounting software, if it doesn’t have a fixed assets module, you’ll still be entering the depreciation journal entry manually. For those still using ledgers and spreadsheets, you’ll also be recording the entry manually, but in your ledgers, not in your software. As a contra account, accumulated depreciation reduces the book value of that asset on the balance sheet.

In accounting, the repayment of the property’s value is carried out concerning all objects, except excluded ones. Depreciation is understood as the depreciation of property, expressed in monetary terms, that occurs in the process of its use. Depreciation is considered to be an expense for accounting purposes, as it results in a cost of doing business. As assets like machines are used, they experience wear and tear and decline in value over their useful lives. Because organizations use the straight-line method almost universally, we’ve included a full example of how to account for straight-line depreciation expense for a fixed asset later in this article. Below are three other methods of calculating depreciation expense that are acceptable for organizations to use under US GAAP.

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Depreciation is assumed to be charged directly to the asset account in the journal entry. After you’ve computed depreciation, you’ll need to write down the expense as a journal entry. It is used to record depreciation expenses for a specific accounting period and can be manually entered into a ledger or entered into your accounting program. The balance sheet reflects the accumulated depreciation as a contra-asset account, which reduces the value of the asset account.

In this case, you need to be guided by the classification of fixed assets, according to which all objects are divided into depreciation groups. Instead of realizing the entire cost of an asset in year one, companies can use depreciation to spread out the cost and match depreciation expenses to related revenues in the same reporting period. This allows a company to write off an asset’s value over a period of time, notably its useful life. In some scenarios, subsequent journal entries may change due to adjustments to the fixed asset’s useful life or value to the company as a result of improvements or impairments of the asset.

This is the ability, under IFRS, to adjust the value of those assets to their fair value as of the balance sheet date.
To calculate the annual depreciation expense using the SYD method, the remaining useful life of the asset is divided by the sum of the digits of the useful life.
To record a depreciation journal entry, businesses need to calculate the depreciation expense for the asset.
For example, on June 01, 2020, the company ABC Ltd. buys and makes a proper record of a $1,770 computer for office use and it is put to use immediately after the purchase.
The inability to apply payments on time and accurately can not only lock up cash, but also negatively impact future sales and the overall customer experience.
At the same time, it is a reduction in the value of the particular asset upon which depreciation has been charged.

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What is Depreciation?

An asset purchase on September 1 would result in 3½ months of depreciation for that first year of service. Some firms calculate the depreciation for the partial year to the nearest full month the asset was in service. For example, they treat an asset purchased on or before the 15th day of the month as if it were purchased on the 1st day of the month.

What is the Journal Entry for Depreciation?

Let’s assume that ABC Co bought machinery for its manufacturing production of $50,000. Assume that on January 1, 2019, Kenzie Company bought a printing press for $54,000. Kenzie pays shipping costs of $1,500 and setup costs of $2,500, assumes a useful life of five years or 960,000 pages. Based on experience, Kenzie Company anticipates a salvage value of $10,000. “Depreciation account” is credited to transfer depreciation into the P&L account. It is important to note that all expenses incurred for the construction of the building are added to the cost of the building.

Explanation of what depreciation is

It is assumed that land has an unlimited useful life; therefore, it is not depreciated, and it remains on the books at historical cost. Let’s assume that a piece of machinery worth 100,000 was purchased on April 1st 2023, with a scrap value of nil and a depreciation rate of 10% (straight-line method). Market value may be substantially different, and may even increase over time. Instead, depreciation is merely intended to gradually charge the cost of a fixed asset to expense over its useful life. Using depreciation allows you to avoid incurring a large expense in a single accounting period, which can severely impact both your balance sheet and your income statement. Drive visibility, accountability, and control across every accounting checklist.

How to Record a Depreciation Journal Entry

Suppose your company owns a single building that you bought for $1,000,000. Under US GAAP, this is how this building would appear in the balance sheet. Even if the fair value of the building is $875,000, the building would still appear on the balance sheet at its depreciated historical cost of $800,000 under US GAAP. Alternatively, if the company used IFRS and elected to carry real estate on the balance sheet at fair value, the building would appear on the company’s balance sheet at its new fair value of $875,000. Depreciation records an expense for the value of an asset consumed and removes that portion of the asset from the balance sheet.

Units of Production

There are several methods that accountants commonly use to depreciate capital assets and other revenue-generating assets. These are straight-line, declining balance, double-declining balance, sum-of-the-years’ digits, and unit of production. The total amount depreciated each year, which is represented as a percentage, is called the depreciation rate. For example, if a company had $100,000 in total depreciation over the asset’s expected life, and the annual depreciation was $15,000. The term “double-declining balance” is due to this method depreciating an asset twice as fast as the straight-line method of depreciation. The “2” in the formula represents the acceleration of deprecation to twice the straight-line depreciation amount.

Fixed assets are purchases your company makes that add value to the business and that help your company make money. In our example, the first year’s double-declining-balance depreciation expense would be $58,000 × 40%, or $23,200. For the remaining years, the double-declining percentage is multiplied by the remaining book value of the asset. Kenzie would continue to depreciate the asset until the book value and the estimated salvage value are the same (in this case $10,000). Applying this to Liam’s silk-screening business, we learn that he purchased his silk-screening machine for $5,000 by paying $1,000 cash and the remainder in a note payable over five years.

The accumulated depreciation account is recorded on the balance sheet and shows the total depreciation expense incurred since the asset was acquired. The asset account is reduced by the accumulated depreciation account, reflecting the true value of the asset on the balance sheet. In addition calculate markup to the methods discussed above, there are other methods for calculating depreciation, such as the units of production method and the hybrid method. Depreciation expense is considered a non-cash expense because the recurring monthly depreciation entry does not involve a cash transaction.