What Are Depreciation and Amortization?
Depreciation refers to reduction in the value of tangible fixed assets over their useful life due to wear and tear, obsolescence, or passage of time.
Amortization, on the other hand, deals with the gradual write-off of intangible assets like patents, copyrights, or trademarks.
🧮 How to Calculate the Depreciation Expense Journal Entry?
Before diving into calculations, keep in mind these four key elements:
1️⃣ Cost of Asset
This includes:
- Purchase price
- Shipping and installation
- Taxes and any additional costs to bring the asset to usable condition
2️⃣ Useful Life
Estimated time (in years or units) the asset will provide economic value.
3️⃣ Salvage Value
Estimated resale or scrap value at the end of its useful life.
4️⃣ Depreciation Method
Common methods include:
- Straight-Line
- Double Declining Balance
- Units of Production
- Sum-of-the-Years’-Digits
🧾 Common Depreciation Methods and Their Formulas
✅ Straight-Line Depreciation
📌 Formula:(Cost – Salvage Value) ÷ Useful Life
✅ Double Declining Balance (DDB)
📌 Formula:2 × (1 ÷ Useful Life) × Book Value at Start of Year
✅ Units of Production
📌 Formula:(Units Produced / Total Expected Units) × (Cost – Salvage Value)
✅ Sum-of-the-Years’-Digits (SYD)
📌 Formula:(Remaining Life ÷ Sum of Years’ Digits) × (Cost – Salvage Value)
🧾 Journal Entry for Depreciation
Depreciation affects two accounts:
- Depreciation Expense (Debit) – Appears on the income statement
- Accumulated Depreciation (Credit) – Contra asset on the balance sheet
🧿 Format:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 15/01/2024 | Depreciation Expense A/c Dr | 1,000 | |
| To Accumulated Depreciation | 1,000 |
🧪 Practical Examples
🧩 Example 1: Straight-Line Depreciation
Asset Cost: $5,000
Useful Life: 5 years
Salvage Value: $0
Annual Depreciation: $1,000
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 15/01/2024 | Depreciation Expense A/c Dr | 1,000 | |
| To Accumulated Depreciation | 1,000 |
🧩 Example 2: Double Declining Balance (Year 1 & 2)
Year 1 Calculation:
Depreciation Rate = 2 / 5 = 40%
Expense = $5,000 × 40% = $2,000
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 15/01/2024 | Depreciation Expense A/c Dr | 2,000 | |
| To Accumulated Depreciation | 2,000 |
Year 2 Calculation:
Book Value = $5,000 – $2,000 = $3,000
Depreciation = $3,000 × 40% = $1,200
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 15/01/2025 | Depreciation Expense A/c Dr | 1,200 | |
| To Accumulated Depreciation | 1,200 |
📂 Amortization Journal Entry
The process is similar to depreciation, but for intangible assets.
🧾 Journal Entry Format:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 31/12/2024 | Amortization Expense A/c Dr | 500 | |
| To Accumulated Amortization | 500 |
✅ Benefits of Depreciation Journal Entries
- 📊 Accurate Financial Reporting
Shows a more realistic view of the company’s asset value. - 💸 Tax Benefits
Reduces taxable income by recognizing asset costs over time. - 📚 Expense Matching Principle
Matches asset costs with the revenue they generate. - 📈 Asset Management
Helps track aging assets for maintenance or replacement. - 🧾 Compliance with GAAP/IFRS
Mandatory for standardized and auditable financial statements.
❓ FAQs
1) Is depreciation a debit or credit entry?
Depreciation expense is a debit. Accumulated depreciation is a credit.
2) Is depreciation a journal entry?
Yes, depreciation is recorded via journal entries to allocate asset costs over time.
3) What is the formula for depreciation?
Depends on the method:
- Straight-Line: (Cost – Salvage Value) / Useful Life
- DDB: 2 × (1 ÷ Useful Life) × Book Value
4) Why is recording depreciation important?
It ensures proper expense allocation, reduces taxes, and keeps books compliant with accounting standards.
🏁 Conclusion
Recording depreciation and amortization journal entries is essential for tracking asset values, reducing tax burdens, and producing accurate financial reports. Whether you’re using straight-line or accelerated methods.