Recording depreciation begins with choosing a depreciation method and ends with ensuring the total accumulated depreciation shown in your general ledger agrees with your end-of-year accumulated depreciation. It requires debiting depreciation expense and crediting accumulated depreciation, as shown in the journal entry below:
| Debit | Credit | |
|---|---|---|
| Depreciation Expense Accumulated Depreciation | xxx | xxx |
However, knowing the journal entry syntax isn’t enough. Your primary concern should be on how much should be debited and credited to each account. Here are four easy steps that’ll teach you how to record a depreciation journal entry.
Step 1: Choose a Depreciation Method
Before you record depreciation, you must first select the depreciation method—and the depreciation method must be uniform for all classes of assets. For example, manufacturing equipment is a fixed asset class depreciated using the double-declining method, while office equipment is a separate fixed asset class using the straight line method.
To learn more about the different depreciation methods, you may check out our following resources:
- Straight line depreciation guide
- Double-declining balance guide
- Units of production depreciation guide
Moreover, our comprehensive guide on depreciation shows the process of depreciation accounting, an overview of popular methods, and a discussion of tax depreciation.
Step 2: Compute Depreciation Expense
The next step is to compute the annual depreciation expense of each fixed asset. You can compute manually by applying the method of your choosing, then go to Step 3 for the journal entry. Read the recommended articles above to see the step-by-step guide on how to compute depreciation expenses under the straight line method, double-declining balance method, and units of production method.
For example, let’s assume the following fixed asset data:
| Espresso Machine 1 ($100 Salvage Value, 10-year Useful Life) | $1,200 |
|---|---|
| Espresso Machine 2 ($200 Salvage Value, 15-year Useful Life) | $2,000 |
| Accumulated Depreciation - Espresso Machines, 1/1 | ($440) |
| Refrigerator (5-year Useful Life) | $500 |
| Accumulated Depreciation - Refrigerator, 1/1 | ($200) |
| Coffee Grinder (5-year Useful Life) | $200 |
| Accumulated Depreciation - Coffee Grinder, 1/1 | ($120) |
| Furniture (5-year Useful Life) | $1,500 |
| Accumulated Depreciation - Furniture, 1/1 | ($300) |
Annual depreciation computations using the straight line method:
- Espresso machine 1: ($1,200 – $100) ÷ 10 = $110
- Espresso machine 2: ($2,000 – $200) ÷ 15 = $120
- Refrigerator: $500 ÷ 5 = $100
- Coffee grinder: $200 ÷ 5 = $40
- Furniture: $1,500 ÷ 5 = $300
The total annual depreciation expense should be $670 ($110 + $120 + $100 + $40 + $300).
Alternatively, you can use a depreciation worksheet to have a formal document. This worksheet is a supporting document that vouches for the depreciation journal entry. However, preparing a depreciation worksheet is an optional step; you can still compute depreciation without this worksheet.
An advantage of using a depreciation worksheet is that it can serve as the basis for the depreciation journal entry. So that when someone audits the books, they’ll see how you arrived at depreciation charges. But that would only matter if you have significant amounts of depreciation charges.
The schedule should at least show the following items:
- Historical cost of the asset
- Salvage value
- Useful life
- Depreciation expense for the year
- Beginning Accumulated Depreciation balance
- Ending Accumulated Depreciation balance
Below is a sample depreciation worksheet format using the same data presented earlier.
| Historical Cost | Salvage Value | Useful Life | Depreciation Expense(Historical Cost - Salvage Value) ÷ Useful Life | 1/1 Accumulated Depreciation | 12/31 Accumulated DepreciationDepreciation Expense + 1/1 Accumulated Depreciation | |
|---|---|---|---|---|---|---|
| Espresso Machine 1 | $1,200 | $100 | 10 | $110 | $440 | $550 |
| Espresso Machine 2 | $2,000 | $200 | 15 | $120 | - | $120 |
| Refrigerator | $500 | - | 5 | $100 | $200 | $300 |
| Coffee Grinder | $200 | - | 5 | $40 | $120 | $160 |
| Furniture | $1,500 | - | 5 | $300 | $300 | $600 |
| $5,400 | $670 | $1,060 | $1,730 |
The highlighted cells are the depreciation adjustments for the year. Use those figures in recording the depreciation entries. The best part of using a depreciation schedule is that it organizes everything in tabular format. However, whether you compute manually or create a worksheet, it essentially shows the same information.
Step 3: Record the Journal Entry
By referring to individual fixed asset depreciation computations in Step 2, the journal entry should be:
| Debit | Credit | |
|---|---|---|
| Depreciation Expense | $670 | |
| Accumulated Depreciation - Espresso Machines | $230 | |
| Accumulated Depreciation - Refrigerator | $100 | |
| Accumulated Depreciation - Coffee Grinder | $40 | |
| Accumulated Depreciation - Furniture | $300 |
Each fixed asset unit should have a separate Accumulated Depreciation account. In our example, we have two espresso machines, but the depreciation of each machine is presented in only one account.
Step 4: Verify if the Depreciation Calculations and General Ledger Balances Agree
After recording the depreciation journal entry, ensure the total accumulated depreciation shown in your general ledger agrees with your end-of-year accumulated depreciation.
If you computed manually, you can compute end-of-year accumulated depreciation by adding depreciation expenses and beginning accumulated depreciation. But if you created a depreciation worksheet, simply refer to the column that shows end-of-year depreciation.
For asset disposals during the year, you’ll need to record those disposals before the amounts will agree. For details on how to do that, read our article on recording the disposal of fixed assets. Meanwhile, if you want to learn more about managing fixed assets, head to our guide on what fixed asset accounting is.
Frequently Asked Questions (FAQs)
Depreciation expense is a debit entry because it is an expense account, while accumulated depreciation is a credit entry because it is a contra-asset account in the balance sheet.
Depreciation reduces income in the income statement because it is an expense.
No, because depreciation is a non-cash expense transaction. Since the income statement uses the accrual basis, non-cash adjustments such as depreciation are recorded. Depreciation expense appears on the Statement of Cash Flow prepared using the indirect method as a positive adjustment to net income to arrive at operating cash flows.
Bottom Line
Knowing how to record depreciation in a journal entry and calculate it per fixed asset can help you understand how depreciation affects your financial statements. For businesses, depreciation can be used for planning and tax-saving purposes. With enough knowledge, business owners will not have a hard time understanding how depreciation impacts net income and net assets.
