What Is Depreciation, and How Is It Calculated?

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The company can make depreciation expense journal entry by debiting the depreciation expense account and crediting the accumulated depreciation account. Depreciation and a number of other accounting tasks make it inefficient for the accounting department to properly track and account for fixed assets. They reduce this labor by using a capitalization limit to restrict the number of expenditures that are classified as fixed assets. Straight-line depreciation is a straightforward and easy-to-use method for calculating depreciation expenses.

Adjusting Entry for Depreciation Expense

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What is the Accounting Entry for Depreciation?

An asset purchase on September 1 would result in 3½ months of depreciation for that first year of service. When an asset is purchased, any expenses incurred on the purchase of the asset (except for goods) increase its cost. They are debited to the “Asset A/c” and not recognised as expenses. Depreciation accumulated over the life of an asset is shown in the accumulated depreciation account. This method requires you to assign all depreciated assets to a specific asset category.

Using the straight-line method is the most basic way to record depreciation. It reports an equal depreciation expense each year throughout the entire useful life of the asset until the entire asset is depreciated to its salvage depreciation expense journal entry value. It’s a common misconception that depreciation is a form of expensing a capital asset over many years. Depreciation is really the process of devaluing the capital asset over a period of time due to age and use.

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Likewise, when a fixed asset is fully depreciated, the accumulated depreciation of that asset equals its total cost. In other words, the net fixed asset value is zero when that time comes. Accumulated depreciation is the total amount of depreciation recorded on a company’s fixed assets since the asset was first put into use.

The accelerated depreciation method calculates a faster rate of depreciation in the early life of the asset, which is beneficial for tax purposes. The matching principle requires all revenue and related expenses to be recorded in the same accounting period when the transaction occurs, regardless of when money changes hands. More than 4,200 companies of all sizes, across all industries, trust BlackLine to help them modernize their financial close, accounts receivable, and intercompany accounting processes. Companies can depreciate their long-term assets for tax and accounting purposes. This allows them to defer the costs of the assets over time, resulting in a more manageable financial burden.