How to Adjust Journal Entries for Depreciation

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Depreciation reduces the book value of an asset.
Depreciation reduces the book value of an asset. (Image: business accounts image by Nicemonkey from <a href='http://www.fotolia.com'>Fotolia.com</a>)

When a company acquires an asset, the company must depreciate the asset over the life of the asset. The problem with depreciation is that it will usually rely on two estimates. The company must estimate the useful life of the asset and the salvage value of the asset. The asset's salvage value is how much the asset will be worth at the end of its useful life. When these estimates change, the company will need to adjust their depreciation journal entries.

Find the original journal entry. For example, a company has a car that depreciates at $5,000 a year. The journal entry would be: debit "Depreciation Expense" by $5,000 and credit "Accumulated Depreciation" by $5,000.

Determine how the change in estimate changes the depreciation amount. For example, if a company changes its useful life estimate on the car, then it would need to recalculate depreciation using the current book value of the car and the new estimated useful life. In the example, the company recomputes depreciation to be $3,000 a year. The company should use the same depreciation method as it first used for the asset. The computation will vary based on the depreciation method.

Record the depreciation each year using the new depreciation figure. In the example, the journal entry would be: debit "Depreciation Expense" by $3,000 and credit "Accumulated Depreciation" by $3,000.

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