How to Prepare Depreciation Accounts
Depreciation is often seen in financial reports prepared under the accrual method of accounting. Account setup for depreciation are a challenge because of calculations involved and the way they must be set up to report properly in your system. Depreciation is calculated using several methods, such as straight-line, double declining and sum-of-years-digits. Firms must be consistent using these methods.
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Instructions
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Create depreciation expense accounts for each type of asset. These accounts are often named "depreciation -- equipment" or "depreciation -- furniture" to identify the the type of asset. Depending on your system, you can create the accounts to report under one major account that could be called "depreciation expense." That way you can monitor depreciation by type, while reporting in the income statement using one line only.
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Set up allowance for depreciation accounts. These accounts could roll up into one major account reporting in the balance sheet as a contra-asset account. Don't close the allowance for depreciation -- the allowance accumulates depreciation expense throughout the years.You could have allowances by type to match depreciation expenses and to keep the bookkeeping simple and organized.
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Map the correct accounts in your fixed asset module. This step is crucial if you're using a computerized accounting system that includes fixed asset maintenance. Review the account mapping setup frequently to pick up on new accounts and reporting. For instance, you could separate your depreciation expense in the general ledger between furniture-headquarters and furniture-branches.
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