How to Reverse Bad Depreciation

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Depreciation represents the use of a fixed asset for a specific accounting period. Accountants record depreciation rather than expensing the purchase of an item because it represents a better financial picture. Different asset types often have different depreciation methods. Accountants must calculate the annual depreciation expense and then post this amount into the general ledger. Incorrect or bad depreciation amounts require accountants to post correcting entries. Depreciation recapture also requires accountants to reclaim depreciation once they sell an asset.

Depreciation Reversal Entry

  • Compute the amount of depreciation that needs reversing. Review the asset's historical cost, salvage value and posted depreciation.

  • Review the original journal entry to determine what financial accounts contain the current depreciation information.

  • Reverse the depreciation entry by posting an entry opposite of the original entry. For example, debit accumulated depreciation and credit depreciation expense.

Depreciation Recapture

  • Calculate the net amount gained from the asset sale. Subtract the accumulated depreciation from the sales price received from the buyer. For example, an asset purchased for $7,000 and accumulated depreciation of $4,000 has a depreciated tax basis of $3,000.

  • Subtract the depreciated tax basis by the current sales price. A company sells the asset for $4,000; the difference is $1,000, which represents a gain on the asset sold.

  • Debit accumulated depreciation and credit gain on sold assets to complete the depreciation recapture entry.

Tips & Warnings

  • Always verify depreciation capture rules with a professional accountant. This process affects a company's tax liability and requires specific rules to properly account for the transaction.

References

  • "Intermediate Accounting"; J. David Spiceland, et al.; 2007
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