Depreciation in the Amount of $300 Was Recorded on the Furniture.
Adjusting entry for depreciation expense
Understanding the Concept of Depreciation
When a fixed nugget is caused by a company, information technology is recorded at cost (by and large, toll is equal to the purchase price of the nugget). This cost is recognized as an asset and not expense. Every bit time passes, the value of a fixed nugget diminishes. This is know as "depreciation", and is caused past 2 types of deterioration – physical and functional.
Physical depreciation results from habiliment and tear due to frequent apply and/or exposure to elements like rain, sun and air current.
Functional or economic depreciation happens when an asset becomes inadequate for its purpose or becomes obsolete. In this instance, the asset decreases in value even without any concrete deterioration.
Calculating Depreciation
There are several methods in depreciating fixed avails. The most common and simplest is the directly-line depreciation method.
Under the directly line method, the toll of the fixed asset is distributed evenly over the life of the nugget.
For instance, ABC Visitor acquired a delivery van for $40,000 at the outset of 2018. Presume that the van tin be used for v years. The unabridged amount of $twoscore,000 shall be distributed over v years, hence a depreciation expense of $eight,000 each year.
Direct-line depreciation expense is computed using this formula:
Historical Toll – Residual Value
Estimated Useful Life
Historical Toll: Purchase price and all incidental toll of the nugget
Rest Value or Bit Value: Estimated value of the stock-still asset at the end of its useful life
Useful Life: Amount of time the stock-still asset can be used (in months or years)
In the to a higher place example, at that place is no residual value. Depreciation expense is computed equally:
= $40,000 – $0
5 years
= $viii,000 per year
Depreciation With Residual Value
What if the commitment van has an estimated residue value of $x,000 afterward five years? The depreciation expense then would be computed as:
= $40,000 – $ten,000
5 years
= $thirty,000
v years
= $half-dozen,000 per year
How to Tape Depreciation Expense
Depreciation is recorded by debiting Depreciation Expense and crediting Accumulated Depreciation. This is recorded at the cease of the catamenia (usually, at the end of every month, quarter, or year).
The entry to record the $vi,000 depreciation every yr would be:
| Dec | 31 | Depreciation Expense | 6,000.00 | |
|---|---|---|---|---|
| Accumulated Depreciation | 6,000.00 |
Depreciation Expense: An expense account; hence, it is presented in the income statement. Information technology is measured from period to menses. In the analogy above, the depreciation expense is $6,000 for 2018, $6,000 for 2019, $six,000 for 2020, etc.
Accumulated Depreciation: A balance sheet account that represents the accumulated balance of depreciation. It is continually measured; hence the accumulated depreciation balance is $half dozen,000 at the end of 2018, $12,000 in 2019, $eighteen,000 in 2020, $24,000 in 2021, and $thirty,000 in 2022.
Accumulated depreciation is a contra-asset account. It is presented in the balance sheet as a deduction to the related fixed nugget. Here'due south a table illustrating the computation of the carrying value of the delivery van for each year of its useful life.
| 2018 | 2019 | 2020 | 2021 | 2022 | |||||
| Historical Cost | $40,000 | $40,000 | $40,000 | $xl,000 | $40,000 | ||||
| Less: Acc. Dep. | 6,000 | 12,000 | 18,000 | 24,000 | 30,000 | ||||
| Carrying Value | $34,000 | $28,000 | $22,000 | $16,000 | $10,000 |
Notice that at the end of the useful life of the asset, the carrying value is equal to the residual value.
Depreciation for Acquisitions Fabricated Within the Menstruum
The delivery van in the example above has been caused at the first of 2018, i.due east. January. Therefore, it is easy to summate for the annual straight-line depreciation. But what if the delivery van was acquired on Apr 1, 2018?
In this case we cannot apply the unabridged annual depreciation in the year 2018 considering the van has been used merely for 9 months (Apr to December). We demand to prorate.
For 2018, the depreciation expense would be: $6,000 10 nine/12 = $4,500.
Years 2019 to 2022 will accept full $6,000 almanac depreciation expense.
In 2023, the van will exist used for 3 months only (Jan to March) since information technology has a useful life of 5 years (i.eastward. from April one, 2018 to March 31, 2023).
The depreciation expense for 2023 would be: $6,000 x 3/12 = $1,500, and thus completing the accumulated depreciation of $30,000.
| 2018 (Apr to Dec) | $ 4,500 |
| 2019 (entire twelvemonth) | 6,000 |
| 2020 (entire yr) | 6,000 |
| 2021 (entire year) | 6,000 |
| 2022 (unabridged yr) | six,000 |
| 2023 (January to March) | 1,500 |
| Total for 5 years | $ 30,000 |
Alternatively, you tin apply "months" instead of "years" for useful life. In our example the useful life is five years, which is 60 months. Monthly depreciation would and then be $500 (i.e. $thirty,000 / lx months). The total depreciation in 2018 for 9 months would still exist $four,500.
Cardinal Takeaways
Depreciation expense is recorded to allocate costs to the periods in which an asset is used.
The journal entry for depreciation expense is:
Dr Depreciation Expense
Cr Accumulated Depreciation
Web link
APA format
Adjusting entry for depreciation expense (2022). Accountingverse.
https://www.accountingverse.com/accounting-basics/depreciation-expense.html
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