Equipment Depreciation Journal Entries

What Is Depreciation?

Depreciation is the systematic allocation of the cost of a fixed asset (such as equipment) over its useful life. Instead of expensing the full cost in the year of purchase, the cost is spread out across the periods that benefit from the asset’s use.

Why Depreciation Is Necessary

1. Matching Principle
   Expenses must be recognized in the same period as the revenue they help generate.
2. Asset Valuation
   Depreciation reduces the carrying amount of the asset over time, reflecting wear and tear and loss of economic value.
3. Accrual Accounting Compliance
   Required under accounting standards (e.g., IFRS, GAAP).

Depreciation Accounts Used

1. Depreciation Expense
   • Income statement account
   • Represents the cost allocated for the current period
   • Normally has a debit balance
2. Accumulated Depreciation
   • Contra-asset (deduction from equipment)
   • Appears in the balance sheet
   • Normally has a credit balance

General Depreciation Journal Entry

To record depreciation for the period:

Debit: Depreciation Expense
Credit: Accumulated Depreciation – Equipment

This entry does not affect the Equipment account directly. The equipment remains recorded at historical cost.

2. Practical Example: Equipment Depreciation Journal Entry

Scenario

A company purchases equipment costing RM120,000.
The equipment has:

• Useful life: 5 years
• Residual value: RM0 (for simplicity)
• Depreciation method: Straight-line

Step 1: Calculate Annual Depreciation

Annual Depreciation=Cost – Residual ValueUseful Life\text{Annual Depreciation} = \frac{\text{Cost – Residual Value}}{\text{Useful Life}}Annual Depreciation=Useful LifeCost – Residual Value​ =RM120,000−05=RM24,000 per year= \frac{RM120,000 – 0}{5} = RM24,000\ \text{per year}=5RM120,000−0​=RM24,000 per year

Step 2: Monthly Depreciation (if required)

RM24,000÷12=RM2,000 per monthRM24,000 \div 12 = RM2,000\ \text{per month}RM24,000÷12=RM2,000 per month

Depreciation Journal Entry (Annual)

Debit: Depreciation Expense – RM24,000  
Credit: Accumulated Depreciation – Equipment – RM24,000

Depreciation Journal Entry (Monthly)

Debit: Depreciation Expense – RM2,000  
Credit: Accumulated Depreciation – Equipment – RM2,000

How It Appears in Financial Statements

Income Statement

• Depreciation Expense → RM24,000 (annual)

Balance Sheet

| Equipment (at cost) | RM120,000 |
| Accumulated Depreciation | (RM24,000) |
| Carrying Amount | RM96,000 |

The equipment cost remains unchanged; only the accumulated depreciation increases.

Additional Practical Notes (Real-World Practice)

• Companies typically automate depreciation using accounting systems (SAP, NetSuite, QuickBooks, etc.).
• Depreciation is often posted monthly even if calculated annually.
• Different methods may be used depending on policy:
  • Straight-line
  • Reducing balance
  • Units of production
  • Sum-of-years’ digits
• Tax depreciation may differ from book (financial) depreciation.

Summary for Students and Practitioners

Equals: Net book value (carrying amount)

Depreciation spreads the cost of equipment over its useful life.

Equipment cost is never directly reduced by depreciation.

Use Depreciation Expense (debit) and Accumulated Depreciation (credit).

Entry is recorded regularly—monthly or annually.

Balance sheet shows:

Equipment at cost

Less: Accumulated depreciation