What Is the Adjustment for a Depreciation Expense?
Business accounting can be surprisingly fluid at times. While certain entries are simple to record and easily transition from one financial statement to another when you're collecting data, many other entries do not move so well. They need to be altered or adjusted through extra entries that add money into some accounts and take it out of others. When depreciation expenses are involved, adjustments can help create the expenses and remove them from places where they are not necessary.
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Depreciation Expenses
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Depreciation expenses are normal expenses businesses record for assets that will be used in the long term, usually for years. Because accounting practices prefer businesses to record value so it corresponds with money spent, assets that the business buys directly are recorded as an amortized series of expenses for the product's useful lifespan. There are several different types of depreciation schedules, but they all require regular depreciation adjustments -- the records of the expense distribution attributed to each year.
Depreciation Expense Account
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The depreciation expense account is the account where the business makes the adjustments. This account holds all the periodic adjustments that will eventually add up to the worth of the asset. It is a debit account, and adjusting entries can be made in it each month or each year, depending on the company's approach to finances.
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Accumulated Depreciation Account
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The other primary step in a normal depreciation adjustment is an entry in the accumulated depreciation account. This is a credit entry to offset the debit entry made in the depreciation expense account, so the two amounts will be equal. Accumulated depreciation is a contra-asset account, made to gauge the negative worth in assets that is building up until the expense can be fully accounted for and the asset, at the end of its useful life, can be subtracted as an asset altogether.
Mistakes
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Sometimes companies forget to make depreciation expense adjustments. In these cases, the company must instead make an adjustment to both account for the depreciation and fix the mistake. If financial statements have already been created and sent out, the business makes an adjustment for the next period, debiting retained earnings to show the intended reduction and crediting accumulated depreciation as the contra-asset account.
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