Journal Entry To Book Depreciation Expense Vs Accumulated

Journal entry to book depreciation expense vs accumulated

A depreciation expense arises due to the reduction in value of a long term asset caused by its limited useful life.

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Most long term assets except for land have a limited useful life as a result of wear and tear and obsolescence and therefore depreciate over time. Wear and tear or physical deterioration results from use. The asset can be kept in good working order by regular repairs and maintenance but ultimately it will have to be discarded and replaced.

Obsolescence is a consequence of changing technology.

Partial Year Depreciation Expense

An asset such as a computer may not have worn out but may have gone out of date and need replacing due to technological changes. In accounting, the depreciation expense is the allocation of the cost of the asset to the accounting periods over which it is to be used.

Journal entry to book depreciation expense vs accumulated

The allocation is necessary to comply with the matching principle , ensuring that the expense of owning the asset is matched to the revenues generated by the asset. The depreciation cost estimate is an expense of the business included in the income statement for each accounting period, and is calculated using the formula shown below.

If for example, a business has purchased furniture with a value of 4, and expects it to have a useful life of 4 years and no salvage value, then we can calculate the straight line depreciation expense as follows:.

Journal entry to book depreciation expense vs accumulated

In this example the depreciable value is 4, and the depreciation expense is 1, per year for the next 4 years. The example above assumes that the business purchased the asset at the beginning of the accounting period and a full years depreciation expense 1, is calculated.

When to Use Depreciation Expense Instead of Accumulated Depreciation

If the business acquires the asset part way through the year it has two options:. There are various methods used to calculate depreciation, but they generally fall into two categories.

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The straight line method depreciates the asset at a constant rate over its useful life. The depreciation charge will be the same for each accounting period. Further details on using the method can be found in our straight line depreciation tutorial.

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The accelerated depreciation method as the name implies, will accelerate the charge for depreciation by making the charge in the early years higher than the charge in the later years.

There are various ways in which accelerated depreciation can be calculated including, declining balance , double declining balance , and sum of digits methods. The choice of depreciation method is governed by the distribution of the economic benefit of using the asset.

What is the accounting journal entry for depreciation?

If most of the benefit arises in the early years then an accelerated depreciation method is best. If the benefit falls evenly over the life of the asset then the straight line depreciation method is best.

The depreciation expense is calculated at the end of an accounting period and is entered as a journal. The first entry is the expense being recorded in the income statement, the second entry is to the accumulated depreciation account which is a contra asset account in the balance sheet.

Depreciation Expense

The accumulated depreciation account is used as it reflects only an estimate of how much the asset has been used during the accounting period, and the asset account itself continues to show the original cost of the asset. It is normal to group long term fixed assets into categories which have the same useful life e.

Journal entry to book depreciation expense vs accumulated

It is important to understand that although the charging of depreciation affects the net income and therefore the amount equity attributable to shareholders of a business, it does not involve the movement of cash. Accumulated Depreciation is simply the total of all the depreciation charges for an asset since it was purchased or first brought into use.

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The accumulated depreciation account is a balance sheet account and has a credit balance. This amount is charged to the profit and loss account each year. This link between depreciation and accumulative depreciation is represented in the diagram below. The cumulative depreciation can also used to determine the net book value of the asset.

Depreciation Expense vs. Accumulated Depreciation

He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.

Journal entry to book depreciation expense vs accumulated

He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University. How to Calculate the Depreciation Expense The depreciation cost estimate is an expense of the business included in the income statement for each accounting period, and is calculated using the formula shown below.

Journal entry to book depreciation expense vs accumulated

Partial Year Depreciation Expense The example above assumes that the business purchased the asset at the beginning of the accounting period and a full years depreciation expense 1, is calculated. If the business acquires the asset part way through the year it has two options: Decide on a specific depreciation accounting policy, such as a full years depreciation expense will be charged in the year of acquisition or, Pro rata the depreciation expense for the first year depending on the number of months the equipment was in use.

In both cases the depreciation method should be applied consistently each accounting period. Methods of Depreciation There are various methods used to calculate depreciation, but they generally fall into two categories.

Purpose of Journal Entry for Depreciation

Straight Line Method The straight line method depreciates the asset at a constant rate over its useful life. Accelerated Depreciation Methods The accelerated depreciation method as the name implies, will accelerate the charge for depreciation by making the charge in the early years higher than the charge in the later years. Depreciation Expense Journal Entry The depreciation expense is calculated at the end of an accounting period and is entered as a journal Depreciation Expense Account Debit Credit Depreciation Expense 1, Accumulated Depreciation 1, Total 1, 1, Last modified January 14th, by Michael Brown.

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