Journal Entries for Depreciation

When an item is depreciated, its asset value goes down. Maybe the owner can sell it for more money, but on the financial records, it's marked as having lost value in one or more periods of time.

So where does that value go? You might be wondering if there's an account that keeps all of that depreciation, and you'd be right!

When we debit a depreciation expense, we need to balance it with a credit - in this case a credit to something called Accumulated Depreciation.

Accumulated Depreciation is a special type of account. It's a contra-asset. This means that, although it's shown with assets, the effect of credits and debits is reversed when compared to normal assets. A contra-asset grows as it is credited, and shrinks as it is debited.

Because we keep a record of the depreciation, when it comes time to sell the asset, we can track whether the sale price covers the remaining accounting value of the asset.

It's important to remember that depreciation never reduces the value of an asset directly - it just increases the accumulated depreciation.

👉 Answer:

👨‍🎓 This is how we solve it:

1. Think about what happens when you sell an item: you get some cash, and you get rid of a machine, and its associated accumulated depreciation. After all, it doesn't make sense to track depreciation on an item that isn't owned any more.

   Journal Entry for the Sale

   Cash	$95.00
   Accumulated Depreciation	$85.00
   Capital Asset		$187.00

2. Now let's see if our ledger is balanced, and if our total debits equal our total credits. In this case, they don't match.
   $95 + $85 != $187
3. In this case, our credits have to increase by 7 to ensure that debits equal credits.
4. When it comes to gains and losses, gains are credits, losses are debits. This shouldn't surprise you - gains and losses flow to owner's equity, so they grow and shrink the same way.

   Journal Entry for the Sale

   Cash	$95.00
   Accumulated Depreciation	$85.00
   Loss on Disposal	$7.00
   Capital Asset		$187.00