Depreciation journal entry is Debit to Depreciation Expense, This records the expense for the current accounting period, reducing the profit for the year Credit to Fixed Asset, This decrease the Fixed asset, reflecting the total depreciation charged to date. It is a contra-asset account, meaning it reduces the carrying amount of the asset on the balance sheet. a Depreciation is the systematic allocation of the cost of a tangible fixed asset over its useful life. It is an accounting method of spreading the expense of an asset over the periods it is used, reflecting its wear and tear, obsolescence, or other factors that reduce its value over time.
Key Concepts
- Depreciation Expense: The portion of the asset’s cost that is being allocated to the current accounting period.
- Accumulated Depreciation: A contra-asset account that accumulates the total depreciation expense charged over the asset’s life.
Journal Entry for Depreciation
Example Scenario
Assume a company has machinery worth ₹500,000 purchased on 01-01-2023. The machinery is to be depreciated at a rate of 10% per annum using the straight-line method. The depreciation for the year 2023 would be ₹50,000.
Step-by-Step Journal Entry
- Record the Depreciation Expense
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 31-12-2023 | Depreciation Expense | 50,000 | Depreciation of machinery for the year | |
| 31-12-2023 | To Accumulated Depreciation | 50,000 | Accumulated depreciation of machinery |
Explanation
- Debit to Depreciation Expense: This records the expense for the current accounting period, reducing the profit for the year.
- Credit to Fixed Asset: This decrease the Fixed asset, reflecting the total depreciation charged to date. It is a contra-asset account, meaning it reduces the carrying amount of the asset on the balance sheet.
Conclusion
Depreciation is a crucial accounting practice to ensure that the value of fixed assets is accurately represented in the financial statements over their useful lives. By systematically allocating the cost of an asset, businesses can match the expense with the revenue it generates, providing a more accurate picture of financial performance and position.