Journal Entries for Depreciation

Lesson:

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.

The managers decided to keep a piece of heavy equipment for another year, so you need to update its depreciation records on the balance sheet.

The only relevant information you've discovered is as follows:

  • The item needs to be depreciated by $59
What journal entries are required to reflect this year's depreciation?

Answer:

  • Journal Entry for Depreciation
    Depreciation Expense     $59.00    
         Accumulated Depreciation     $59.00    
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