How to Account for Depreciation Expenses
Depreciation expense is taken annually to recognize the cost of an asset as the company uses the asset. Depreciation expense is on the income statement. It reduces the company's income for the year. Depreciation expense is not a cash expense, but it is a non-cash expense. This is because no cash is lost, it is just recognized as an expense at a later time. The accumulated depreciation is the total amount of depreciation expense since the asset was bought.
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Instructions
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Determine the method of depreciation your company will use. The most common are straight-line, sum of years' digits and double declining. For example, a company uses straight-line depreciation.
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2
Determine the depreciation amount. In the example, the company has a $10,000 car that they estimate has a $1,000 residual value. The residual value is a company's estimate of how much the asset will be worth at the end of its useful life. The company estimates the car's useful like is eight years. So, $10,000 minus $1,000 equals $9,000. Then $9,000 divided by 8 years equals depreciation of $1,125 a year.
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3
Debit "Depreciation Expense" and credit "Accumulated Depreciation" by the amount calculated in Step 2, each year. In our example, debit "Depreciation Expense" by $1,125 and credit "Accumulated Depreciation" by $1,125.
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References
- Photo Credit yellow car, a honda japanese sport car model image by alma_sacra from Fotolia.com
