Is Depreciation Expense Debit or Credit?

When the fixed assets are sold or disposed of, the accumulated depreciation of the fixed assets that are sold or disposed of will need to be removed as well from the balance sheet together with the fixed assets themselves. Of course, this also applies when the company makes an exchange of fixed assets to replace the old fixed what is bookkeeping assets with the new ones. A company can increase the balance of its accumulated depreciation more quickly if it uses an accelerated depreciation over a traditional straight-line method. An accelerated depreciation method charges a larger amount of the asset’s cost to depreciation expense during the early years of the asset.

• Accumulated depreciation is the total amount of depreciation expense recorded for an asset on a company’s balance sheet.
• Over time, the amount of accumulated depreciation will increase as more depreciation is charged against the fixed assets, resulting in an even lower remaining book value.
• The balance rolls year-over-year, while nominal accounts like depreciation expense are closed out at year end.
• As earlier said the offset to the depreciation expense debit entry would be a credit to the accumulated depreciation account (which is a contra-asset account).
• Accumulated depreciation allows investors and analysts to see how much of a fixed asset’s cost has been depreciated.

Although it is reported on the balance sheet under the asset section, accumulated depreciation reduces the total value of assets recognized on the financial statement since assets are natural debit accounts. Also, recall that a credit entry will increase equity, revenue or liability while decreasing expense or asset accounts and a debit entry will increase expense or asset accounts while reducing equity, revenue or liability. Therefore, accumulated depreciation is not a debit but a credit because it decreases an asset (fixed and capital asset) account.

This account carries the total cumulative amount of asset depreciation charged to date (aggregates the amount of depreciation expense charged against the fixed asset). The journal entry for depreciation can be a simple entry designed to accommodate all types of fixed assets, or it may be subdivided into separate entries for each type of fixed asset. Over time, the accumulated depreciation balance will continue to increase as more depreciation is added to it, until such time as it equals the original cost of the asset. At that time, stop recording any depreciation expense, since the cost of the asset has now been reduced to zero. In accounting, the numbers from business transactions are recorded in at least two accounts, either as a debit or as a credit. For instance, when an entry to record depreciation is made to the depreciation expense account, there must be an offsetting entry to another account.

The journal entry for depreciation expense is a debit entry because it is an expense. As earlier said the offset to the depreciation expense debit entry would be a credit to the accumulated depreciation account (which is a contra-asset account). A contra-asset account has a contrary entry to the natural debit balance of the asset account. The purpose of the debit journal entry for depreciation expense is to achieve the matching principle.

Accumulated Depreciation Journal Entry (Debit or Credit)

Depreciation expense is considered a non-cash expense because the recurring monthly depreciation entry does not involve a cash transaction. Because of this, the statement of cash flows prepared under the indirect method adds the depreciation expense back to calculate cash flow from operations. The methods used to calculate depreciation include straight line, declining balance, sum-of-the-years’ digits, and units of production. Depreciation allows a company to spread the cost of an asset over its useful life, which avoids having to incur a significant cost from being charged when the asset is initially purchased. It is an accounting measure that allows a company to earn revenue from an asset, and pay for it over the time it is used.

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Whereas the accumulated depreciation of which the offsetting entry is made is presented on the balance sheet below the line for related capitalized assets. The balance of the accumulated depreciation increases over time, as the amount of depreciation expense recorded in the current period, is added. Depreciation is the gradual charging to expense of an asset’s cost over its expected useful life. Depreciation allows the company to even out the cost of an asset over its useful life. Hence, it is a running total of the depreciation expense that has been recorded over the years.

Since accelerated depreciation is an accounting method used to recognize depreciation, the result of accelerated depreciation is to book accumulated depreciation. Under this method, the amount of accumulated depreciation accumulates faster during the early years of an asset’s life and accumulates slower later. When it comes to the bookkeeping of a business, debits and credits are very essential for the correct balancing of the financial accounts.

• Since we are using straight-line depreciation, $9,500 will be the depreciation for each year.
• Using a similar approach, the equipment’s book value is zero at the end of the tenth year.
• Accumulated depreciation is a running total of the depreciation expense that has been recorded over the years and is offset against the sale of the asset.
• After the 5-year period, if the company were to sell the asset, the account would need to be zeroed out because the asset is not relevant to the company anymore.

However, accumulated depreciation is reported within the asset section of a balance sheet. Contra accounts are recorded with a credit balance that decreases the balance of an asset. As a result, accumulated depreciation reduces fixed and capital asset balances (reducing the net book value of the capital asset section). It is the total depreciation that is reduced from the value of an asset, which is therefore recorded on the credit side to offset the balance of the asset. At the end of the accounting year, the debit balances in the expense account will be closed and transferred to the owner’s capital account or retained earnings (stockholders’ equity account), thereby reducing equity.

Impact From the Sale of an Asset

Tracking the depreciation expense of an asset is important for reporting purposes because it spreads the cost of the asset over the time it’s in use. Net income is the number left over after all cost of goods sold, operating expenses, selling, general, and administrative expenses, depreciation, interest, taxes, and any other expenses have been accounted for. The formula for calculating the accumulated depreciation on a fixed asset (PP&E) is as follows.

Formula and Calculation of Accumulated Depreciation

As regards this, the statement of cash flows prepared under the indirect method adds the depreciation expense back to calculate the cash flow from operations. Depreciation expenses, on the other hand, are the allocated portion of the cost of a company’s fixed assets for a certain period. Depreciation expense is recognized on the income statement as a non-cash expense that reduces the company’s net income or profit. For accounting purposes, the depreciation expense is debited, and the accumulated depreciation is credited.

That is, the formula for the net book value of an asset is the cost of the asset minus accumulated depreciation. When accounting for business transactions, the numbers are recorded in the debit and credit columns. The debit and credit entries are used within a business’s chart of accounts to record every transaction.

Straight-Line Method

Accumulated depreciation takes into consideration the total amount of depreciation of an asset from the point that it started being used. It is what is known as a contra account; in this case, an asset whose natural balance is a credit, as it offsets the negative value balance (debit) of the asset account it is linked to. Some companies don’t list accumulated depreciation separately on the balance sheet.

Sum-of-the-Years’ Digits Method

In other words, depreciation spreads out the cost of an asset over the years, allocating how much of the asset that has been used up in a year, until the asset is obsolete or no longer in use. Without depreciation, a company would incur the entire cost of an asset in the year of the purchase, which could negatively impact profitability. Though depreciation is a cost, which affects net income, accumulated depreciation is a bookkeeping method that does not directly affect net income. In order to calculate the depreciation expense, which will reduce the PP&E’s carrying value each year, the useful life and salvage value assumptions are necessary.

Like most small businesses, your company uses the straight line method to depreciate its assets. The balance sheet would reflect the fixed asset’s original price and the total of accumulated depreciation. Watch this short video to quickly understand the main concepts covered in this guide, including what accumulated depreciation is and how depreciation expenses are calculated. A commonly practiced strategy for depreciating an asset is to recognize a half year of depreciation in the year an asset is acquired and a half year of depreciation in the last year of an asset’s useful life. This strategy is employed to fairly allocate depreciation expense and accumulated depreciation in years when an asset may only be used for part of a year.