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Journal Entries for Depreciation

Lesson
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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.

Question
The sales team has great news! It just sold some heavy equipment that has been sitting on your financials for ages.

This is what you've been told:

  • You noticed that there was $130 in accumulated depreciation recorded for this asset.

  • The item had been acquired by your firm for $160.

  • You firm received a cash payment of $40.


What are the journal entries required for this sale?
Answer
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👉 Answer:

  • Journal Entry for the Sale
    Cash     $40.00    
    Accumulated Depreciation     $130.00    
         Capital Asset     $160.00    
         Gain on Disposal     $10.00    

👩‍🎓 Here are the steps to figure it out:

  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     $40.00    
    Accumulated Depreciation     $130.00    
         Capital Asset     $160.00    
  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.
    $40 + $130 != $160
  3. In this case, our debits have to increase by 10 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     $40.00    
    Accumulated Depreciation     $130.00    
         Capital Asset     $160.00    
         Gain on Disposal     $10.00    
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