Depreciation represents the gradual reduction in the value of a fixed asset over time due to wear and tear, obsolescence, or usage. Depreciation is an essential accounting concept as it helps businesses allocate the cost of an asset over its useful life.
Here are examples of journal entries for recording depreciation:
Example 1: Straight-Line Depreciation
Suppose your business purchases machinery for $50,000 on January 1, 2024. The machinery has an estimated useful life of 5 years and no salvage value. The annual depreciation expense is calculated as:
Depreciation Expense = (Cost of Asset – Salvage Value) / Useful Life Depreciation Expense = ($50,000 – $0) / 5 = $10,000 per year
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Depreciation Expense | 10,000 | |
| 12-31-2024 | To Accumulated Depreciation – Machinery | 10,000 |
Explanation:
- Depreciation Expense will debited to recognize the annual depreciation cost.
- Accumulated Depreciation – Machinery will credited as a contra-asset account that reduces the book value of the machinery.
Example 2: Double-Declining Balance Depreciation
Let’s assume the same machinery is depreciated using the double-declining balance method. The double-declining rate is twice the straight-line rate:
Straight-Line Rate = 1 / Useful Life = 1 / 5 = 20% Double-Declining Rate = 20% × 2 = 40%
Depreciation Expense for the First Year: Depreciation Expense = Beginning Book Value × Double-Declining Rate Depreciation Expense = $50,000 × 40% = $20,000
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Depreciation Expense | 20,000 | |
| 12-31-2024 | To Accumulated Depreciation – Machinery | 20,000 |
Explanation:
- Depreciation Expense will debited to account for the higher depreciation expense in the first year.
- Accumulated Depreciation – Machinery will credited to increase the contra-asset balance.
Example 3: Units of Production Depreciation
If the machinery is expected to produce 100,000 units over its useful life, and it produces 20,000 units in the first year, the depreciation expense is calculated based on usage:
Depreciation Expense = (Cost of Asset – Salvage Value) × (Units Produced / Total Estimated Units) Depreciation Expense = ($50,000 – $0) × (20,000 / 100,000) = $10,000
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Depreciation Expense | 10,000 | |
| 12-31-2024 | To Accumulated Depreciation – Machinery | 10,000 |
Explanation:
- Depreciation Expense will debited based on the units produced during the year.
- Accumulated Depreciation – Machinery will credited to reflect the reduction in the machinery’s value.
Example 4: Depreciation for Partial Year
Suppose your business purchases machinery for $50,000 on July 1, 2024, with the same 5-year useful life. The straight-line depreciation for the first half-year is:
Depreciation Expense = ($50,000 / 5) × 6/12 = $5,000
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Depreciation Expense | 5,000 | |
| 12-31-2024 | To Accumulated Depreciation – Machinery | 5,000 |
Explanation:
- Depreciation Expense will debited for half a year since the machinery was purchased mid-year.
- Accumulated Depreciation – Machinery will credited to account for the partial year’s depreciation.
Example 5: Depreciation of Office Furniture (Straight-Line Method)
Your business purchases office furniture for $10,000 on January 1, 2024. The furniture has a useful life of 10 years and no salvage value. The annual depreciation expense is:
Depreciation Expense = (Cost of Asset – Salvage Value) / Useful Life Depreciation Expense = ($10,000 – $0) / 10 = $1,000 per year
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Depreciation Expense | 1,000 | |
| 12-31-2024 | To Accumulated Depreciation – Office Furniture | 1,000 |
Explanation:
- Depreciation Expense will debited to reflect the cost of the furniture’s usage for the year.
- Accumulated Depreciation – Office Furniture will credited as a contra-asset account, reducing the book value of the furniture.
Example 6: Depreciation of a Vehicle (Sum-of-the-Years’-Digits Method)
Your business purchases a delivery vehicle for $30,000 on January 1, 2024. The vehicle has a useful life of 5 years and no salvage value. Using the sum-of-the-years’-digits method, the sum of the digits for 5 years is:
Sum of the Years’ Digits = 1 + 2 + 3 + 4 + 5 = 15
Depreciation Expense for Year 1: Depreciation Expense = (Remaining Life / Sum of the Years’ Digits) × (Cost – Salvage Value) Depreciation Expense for Year 1 = (5/15) × $30,000 = $10,000
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Depreciation Expense | 10,000 | |
| 12-31-2024 | To Accumulated Depreciation – Vehicle | 10,000 |
Explanation:
- Depreciation Expense will debited to reflect the accelerated depreciation in the first year.
- Accumulated Depreciation – Vehicle will credited to adjust the book value of the vehicle.
Example 7: Depreciation of Computer Equipment (Straight-Line Method)
Your business purchases computer equipment for $15,000 on January 1, 2024. The equipment has a useful life of 3 years and no salvage value. The annual depreciation expense is:
Depreciation Expense = (Cost of Asset – Salvage Value) / Useful Life Depreciation Expense = ($15,000 – $0) / 3 = $5,000 per year
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Depreciation Expense | 5,000 | |
| 12-31-2024 | To Accumulated Depreciation – Computer Equipment | 5,000 |
Explanation:
- Depreciation Expense will debited to account for the annual reduction in the equipment’s value.
- Accumulated Depreciation – Computer Equipment will credited to reduce the asset’s book value.
Example 8: Depreciation of a Building (Straight-Line Method)
Your business purchases a building for $200,000 on January 1, 2024. The building has a useful life of 20 years and a salvage value of $20,000. The annual depreciation expense is:
Depreciation Expense = (Cost of Asset – Salvage Value) / Useful Life Depreciation Expense = ($200,000 – $20,000) / 20 = $9,000 per year
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Depreciation Expense | 9,000 | |
| 12-31-2024 | To Accumulated Depreciation – Building | 9,000 |
Explanation:
- Depreciation Expense will debited to recognize the cost of using the building for the year.
- Accumulated Depreciation – Building will credited to reduce the building’s book value on the balance sheet.
Example 9: Depreciation of Leasehold Improvements (Straight-Line Method)
Your business makes leasehold improvements for $25,000 on January 1, 2024. The improvements have a useful life of 5 years, which aligns with the lease term.
Depreciation Expense = Cost of Leasehold Improvements / Useful Life Depreciation Expense = $25,000 / 5 = $5,000 per year
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Depreciation Expense | 5,000 | |
| 12-31-2024 | To Accumulated Depreciation – Leasehold Improvements | 5,000 |
Explanation:
- Depreciation Expense will debited to spread the cost of leasehold improvements over the lease term.
- Accumulated Depreciation – Leasehold Improvements will credited to reflect the reduction in the value of the improvements.
These examples illustrate different methods of calculating and recording depreciation, helping businesses accurately allocate the cost of fixed assets over their useful lives.