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January 19, 2007

What is the accounting journal entry for depreciation?

The journal entry for depreciation contains a debit to the income statement account Depreciation Expense and a credit to the balance sheet account Accumulated Depreciation.

The purpose of the journal entry for depreciation is to achieve the matching principle. In each accounting period, part of the cost of certain assets (equipment, building, vehicle) gets moved from the balance sheet to depreciation expense on the income statement so it can be matched with the revenues obtained by using these assets.

The account Accumulated Depreciation is reported under the asset heading of Property, Plant and Equipment. It is also known as a contra asset account because it is an asset account with a credit balance. Because Accumulated Depreciation is a balance sheet (or real or permanent) account, its balance will carry over to the next accounting period. This means that its credit balance could get as large as the cost of the assets being depreciated.

The income statement account Depreciation Expense is a temporary account. At the end of each year, its balance is transferred out of the account and Depreciation Expense will begin the new year with a zero balance.

It is important to realize that when the depreciation expense entry is recorded, a company’s net income is reduced by the expense, but its cash is not reduced. (Cash would have been reduced when the asset was acquired.) You should also realize that depreciation is an estimate based on the asset’s historical cost (not its replacement cost), its estimated useful life, and its estimated salvage value. The focus of depreciation is to allocate and match the cost to expense and it is not to provide an estimate of the current value of the asset. As a result, the market value of a one year old computer will likely be less than the remaining amount reported on the balance sheet. On the other hand, a rental property in a growing area might have a market value that is greater than the remaining amount reported on the balance sheet.

Learn more about Depreciation.

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Comments

21 Responses to “What is the accounting journal entry for depreciation?”

  1. rohit on March 25th, 2008 7:58 am

    Explain the deprication in accountancy?

  2. Mohammed N Ameen on June 29th, 2008 1:03 am

    i want to know how will pass the entry to cheque return, sales return, purchase return, discount on bill, discount, and depreciation

  3. ZAREER on August 4th, 2008 6:59 am

    Can u pls tel me which method of preparation of final account is better? whether horizontal method or vertical method?

  4. nssraja on August 28th, 2008 1:35 am

    depreciation entries

  5. ASGHAR on January 28th, 2009 11:36 pm

    how to paas general entries if depreciation of machine is 55000

  6. arijit on February 2nd, 2009 9:27 pm

    Is depreciation is a source of internal capital?

  7. Gabriel on February 9th, 2009 3:32 am

    Which two accounts are involved when one purchases a vehicle.

  8. Ataullah on March 10th, 2009 2:34 am

    Arajit
    Depreciation is not a source of capital
    it is the reduction in the value of the asset.
    when u purchase an asset you consider a useful life and divide by that value by life of asset.

    vehicles
    to cash / bank a/c

  9. Ataullah on March 10th, 2009 2:38 am

    Depreciatio exp
    to machine

    reduce the value of machine by amount or %

  10. rahman on July 31st, 2009 9:37 pm

    depreciation a/c Dr
    To Asset a/c

  11. pradeep on August 7th, 2009 5:19 am

    Depreciation

    Depreciation A/c Dr

    To Asset A/C

  12. SANDRA on August 26th, 2009 5:09 am

    sold an asset (machinery), how do I journalise?
    1. Capture invoice to P/L account
    2. Journal to take out of asset account

    It effect the depreciation, but I dont know how to journalise it.

    please help

  13. vinod on September 9th, 2009 9:10 am

    no idea

  14. jeremy - CPA on September 30th, 2009 11:05 pm

    SANDRA

    Depends on what you sold it at, wether you will recognize a gain or a loss. Usually a sale of a Fixed Asset (machinery) will result in a gain/loss in income from continuing operations, a component of net income on your income statement. Everything in accounting relates to the nature or the underlyings of accounting transactions.

    Simple example assuming a gain on a machine that is has a Accum Depreciuation to date of $3,500 an historic cost of $5,000 being purchased with $2,000 cash:

    Cash 2,000 (added to B/S)
    A/D 3,500 (reverse A/D on asset sold)
    Gain on Sale 500 (book to I/S)
    Machine 5,000 (remove from B/S)

  15. nicky on October 11th, 2009 11:50 am

    store equipment bought on may 1st for 83000 and salvage value is 12500 usage life five yrs got prepaid 7050 what to pay on Oct. 31st

  16. Muluh on October 17th, 2009 7:29 am

    Depreciation is like a source of internal capital to an institition,in the sense that its accummulated value increases operating capital. But again, what becomes of the capital employment when a new asset has to be bought?

  17. salas on October 22nd, 2009 1:26 pm

    Depriciation a/c Dr
    To Fixed Asset a/c

  18. jeremy - CPA on October 22nd, 2009 4:46 pm

    Salas-

    you would credit accumulated depreciation, not the fixed asset. Maybe thats what you mean and I’m just looking at it wrong. The assets historic balance never changes on the general ledger until you write it off or sell it.

  19. chris on October 23rd, 2009 9:18 am

    I LIKE how u tackle questions and would be grateful if u send ( meaning of accounting ) to my email for me

  20. newmhie on October 30th, 2009 1:21 am

    hi/?
    i love your site..
    may i know the answer on this situation..

    in a company., when you are purchasing materials for the production on credit ,, the entry is

    purchases debit
    accounts payable credit

    when you paid for it, the entry will be

    accounts payable debit
    cash credit

    what entry will i use to record the payment of the accounts payable in the daily cash flow schedule?
    will i include it in the purchases? expenses or what?
    please clarify for me,,
    thanks a lot..

  21. jeremy - CPA on October 30th, 2009 4:05 pm

    In the statement of cash flow you have to categorize items under:

    Operating
    Investing
    Financing

    This transaction would be under operating cash flows (outflow) for the amount paid for inventory (or purchases in your case, which falls under the periodic method I believe).

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