11/14/21, 3:57 PM The accounting entry for depreciation — AccountingTools

What is the Accounting Entry for Depreciation?

The accounting for depreciation requires an ongoing series of entries to charge a

fixed asset to expense, and eventually to derecognize it. These entries are
designed to reflect the ongoing usage of fixed assets over time.

Depreciation is the gradual charging to expense of an asset's cost over its

expected useful life. The reason for using depreciation to gradually reduce the
recorded cost of a fixed asset is to recognize a portion of the asset's expense at
the same time that the company records the revenue that was generated by the
fixed asset. Thus, if you charged the cost of an entire fixed asset to expense in a
single accounting period, but it kept generating revenues for years into the
future, this would be an improper accounting transaction under the matching
principle, because revenues are not being matched with related expenses.

In reality, revenues cannot always be directly associated with a specific fixed

asset. Instead, they can more easily be associated with an entire system of
production or group of assets, such as a production line.

The journal entry for depreciation can be a simple entry designed to

accommodate all types of fixed assets, or it may be subdivided into separate
entries for each type of fixed asset. The basic journal entry for depreciation is to
debit the Depreciation Expense account (which appears in the income statement)
and credit the Accumulated Depreciation account (which appears in the balance
sheet as a contra account that reduces the amount of fixed assets). Over time, the
accumulated depreciation balance will continue to increase as more depreciation
is added to it, until such time as it equals the original cost of the asset. At that
time, stop recording any depreciation expense, since the cost of the asset has
now been reduced to zero.

Example of the Depreciation Entry

ABC Company calculates that it should have $25,000 of depreciation expense in

the current month. The entry is:

   Debit Credit
 Depreciation expense  25,000  
      Accumulated depreciation   25,000

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11/14/21, 3:57 PM The accounting entry for depreciation — AccountingTools

In the following month, ABC's controller decides to show a higher level of

precision at the expense account level, and instead elects to apportion the
$25,000 of depreciation among different expense accounts, so that each class of
asset has a separate depreciation charge. The entry is:

   Debit Credit
 Depreciation expense - Automobiles  4,000  
 Depreciation expense - Computer equipment  8,000  
 Depreciation expense - Furniture & fixtures  6,000  
 Depreciation expense - Office equipment  5,000  
 Depreciation expense - Software  2,000  
      Accumulated depreciation   25,000

Cash Impact of Depreciation

Depreciation is considered an expense, but unlike most expenses, there is no

related cash outflow. This is because a company has a net cash outflow in the
entire amount of the asset when the asset was originally purchased, so there is no
further cash-related activity. The one exception is a capital lease, where the
company records it as an asset when acquired but pays for the asset over time,
under the terms of the associated lease agreement.

The Capitalization Limit

Depreciation and a number of other accounting tasks make it inefficient for the
accounting department to properly track and account for fixed assets. They
reduce this labor by using a capitalization limit to restrict the number of
expenditures that are classified as fixed assets. Any expenditure for which the
cost is equal to or more than the capitalization limit, and which has a useful life
spanning more than one accounting period (usually at least a year) is classified
as a fixed asset, and is then depreciated.

The Difference Between Carrying Cost and Market

Value

Finally, depreciation is not intended to reduce the cost of a fixed asset to its
market value. Market value may be substantially different, and may even
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11/14/21, 3:57 PM The accounting entry for depreciation — AccountingTools

increase over time. Instead, depreciation is merely intended to gradually charge

the cost of a fixed asset to expense over its useful life.

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