Depreciation Adjusting Entries
Accountants record adjusting entries at the end of each accounting period to bring specific accounts up to date. These accounts represent balances which have changed, but no specific transaction occurred during the period. Depreciation is the most common adjusting entry made at the end of each accounting period.
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Fixed Assets
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Most companies acquire fixed assets to use in the operation of the business. Manufacturing facilities use fixed assets, such as production equipment, to manufacture products for sale to customers. Service companies acquire fixed assets to use in providing the service, such as a snowplow to remove snow from parking lots. Many companies purchase buildings to house their operation.
The accountant records the acquisition of these assets at the total purchase price of the individual asset. The total purchase price includes the price paid, any delivery charges incurred and installation charges.
Depreciation Expense
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Businesses do not record the fixed asset as an expense when they acquire it. Instead they expense the fixed asset over its expected life through depreciation. Depreciation expense refers to the gradual loss in value experienced by the asset. Companies choose between different methods for depreciating fixed assets and use the fixed asset's expected life and the estimated sales value at the end of its life. Straight line depreciation is the easiest method to use and simply divides the total value of the fixed asset by the asset's expected life. Other methods exist which allow the company to depreciate a greater amount at the beginning of the asset's life than toward the end.
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Accumulated Depreciation
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Accumulated depreciation represents the sum of each depreciation amount recorded throughout the life of the asset. While a fixed asset is recorded as an asset, accumulated depreciation is recorded as a contra asset. The value of the fixed asset equals the purchase price and remains the same as long as the company owns the asset. Accumulated depreciation increases each time depreciation is recorded. The current value of the asset is calculated by taking the fixed asset value less the accumulated depreciation.
Adjusting Journal Entry
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At the end of each accounting period, no event occurs signifying that depreciation has occurred. The accountant reviews each account, recognizes that a fixed asset must depreciate and records the adjusting entry. The adjusting entry to record depreciation includes a debit to depreciation expense and a credit to accumulated depreciation.
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