Journal entries

Depreciation expense can be recorded using the following journal entry:

Depreciation expense XYZ

Accumulated depreciation XYZ

The credit is always made to the accumulated depreciation, and not to the cost account directly.

Straight-line depreciation can also be calculated using Microsoft Excel SLN function.

Examples
Example 1: Whole-period depreciation in the period of purchase

On 1 July 20X1, Company A purchased a vehicle at a cost of $20,000. The company expects the
vehicle to be equally useful for 4 years after which it can be sold for $5,000. Calculate
depreciation expense for the financial years ended 31 Dec 20X1, 20X2, 20X3 and 20X4.

Solution:

The depreciable amount of the vehicle is $15,000 ($20,000 cost minus $5,000 residual value)
and useful life is 4 years.

Depreciation expense for the year ended 31 Dec 20X1 = $15,000 ÷ 4 = $3,750 per year.

Depreciation expense shall remain the same over the useful life. Hence, an amount of $3,750
shall be the depreciation expense for years ended 31 Dec 20X2, 20X3 and 20X4.

Even though the asset was bought mid-year, full year depreciation expense is charged in 20X1
and no depreciation expense shall be charged in 20X5 because the asset would be fully
depreciated by the end of 20X4.

Example 2: Proportional depreciation

If Company A (in the scenario discussed above) had a policy of charging proportional
depreciation expense in the years of purchase and disposal, the total depreciation expense shall
remain the same, but the period-wise allocation would be different.

Under this scenario, the vehicle is used only for 6 months in the financial year ended 30 June
20X1. Proportional depreciation expense is calculated by multiplying the full year straight line
depreciation expense by a fraction representing the part of the financial year during which the
asset was used.

Depreciation expense for year ended 30 June 20X1 = [ ($20,000 − $5,000) ÷ 4 ] × 6/12 = $1,875
Full-year depreciation shall be charged in the financial years ended 30 June 20X2, 20X3 and
20X4, and partial depreciation expense shall be charged in the year of disposal i.e. financial year
ended 30 June 20X5.

Presentation in income statement and balance sheet

The following depreciation schedule presents the asset’s income statement and balance sheet
presentation in each of the years.

Depreciation Carrying Value

Purchase – 20,000
Year ended 20X1-06-30 1,875 18,125
Year ended 20X2-06-30 3,750 14,375
Year ended 20X3-06-30 3,750 10,625
Year ended 20X4-06-30 3,750 6,875
Year ended 20X5-06-30 1,875 5,000

Please note that the carrying amount of the asset will never fall below the residual value because
this is the amount which can be recovered even when the asset is no longer being used.