JournaldrillDepreciation entry
Depreciation is recorded with an adjusting entry that debits Depreciation Expense and credits Accumulated Depreciation, a contra-asset account; the asset's cost stays unchanged. Straight-line depreciation per year equals (cost minus salvage value) divided by useful life, and book value equals cost minus accumulated depreciation.
Syntax
Annual depreciation = (Cost - Salvage) / Useful life; Dr Depreciation Expense / Cr Accumulated Depreciation| Part | What it is |
|---|---|
Cost | Purchase price plus costs to get the asset ready for use (freight, installation). |
Salvage (residual) value | Estimated value at the end of the useful life; it is not depreciated. |
Useful life | Estimated years (or units) the business will use the asset. |
Accumulated Depreciation | Contra-asset with a credit balance, shown under the asset on the balance sheet. |
Examples
Dr Depreciation Expense 9,000 / Cr Accumulated Depreciation, Equipment 9,000Result: Expense 9,000; book value after year 1 = 50,000 - 9,000 = 41,000
Equipment cost 50,000, salvage 5,000, 5-year life: (50,000 - 5,000) / 5 = 9,000 per year.
Dr Depreciation Expense 750 / Cr Accumulated Depreciation, Equipment 750Result: Monthly expense 750
Same asset, monthly adjusting entry: 9,000 / 12 = 750.
Dr Depreciation Expense 2,250 / Cr Accumulated Depreciation, Equipment 2,250Result: Partial first year: 3 months of use
Asset bought October 1: 9,000 x 3/12 = 2,250 for the year.
Common mistakes
- Crediting the asset account directly: credit Accumulated Depreciation so the original cost stays visible on the balance sheet.
- Depreciating the full cost when there is a salvage value: subtract salvage first; total depreciation over the life never exceeds cost minus salvage.
- Recording a full year of depreciation on an asset bought mid-year: prorate by the months the asset was in service.
- Depreciating land: land is not depreciated; only buildings, equipment, vehicles and similar assets with a limited life are.
Practice Depreciation entry
These drills check your answer on live data, free, no account needed.
- Straight-line depreciationOn April 1, Riverbend Catering bought kitchen equipment for $38,000. It expects a salvage value of $2,000 and a useful life of 6 years, and uses the straight-line method. Record depreciation for the year ended December 31 (9 months of use).
Questions
What is the journal entry for depreciation?
Debit Depreciation Expense and credit Accumulated Depreciation for the period's amount.
Is accumulated depreciation an asset or liability?
Neither in the usual sense. It is a contra-asset: it carries a credit balance and is subtracted from the asset's cost to give book value.
How do you calculate straight-line depreciation?
(Cost minus salvage value) divided by useful life in years gives the annual amount; divide by 12 for the monthly entry.
Related
- Sale of equipment (gain or loss)How to record selling a fixed asset: remove cost and accumulated depreciation, record the cash and book the gain or loss versus book value. Three examples.
- Prepaid expense adjustmentHow to record a prepayment as an asset and expense the part used each period: Dr Insurance Expense, Cr Prepaid Insurance. Prepaid rent and supplies too.
- Closing entriesHow to close the books: close revenues and expenses to Income Summary, close Income Summary to Retained Earnings, then close Dividends. Worked example.
- Inventory write-downHow to write inventory down when net realizable value falls below cost: Dr Cost of Goods Sold or Loss on Write-Down, Cr Inventory. Shrinkage included.