Depreciation journal entries: Definition, calculation, and examples

Whether it’s vehicles, laptops, office furniture, or machinery, every business has fixed assets to manage.  

But, despite how commonplace fixed assets are, accounting for them can be a challenge. A clear understanding of fixed asset depreciation and the corresponding journal entries can help make the process easier.  

This post will delve into the specifics of depreciation expense journal entries, where and how to record them, and how they impact financial statements.  

What is a depreciation expense?

Asset depreciation is the process of allocating the cost of a fixed asset over its useful life. This accounts for the fact that assets depreciate due to wear and tear, obsolescence, and other factors.  

A depreciation expense is the total amount deducted each period from the asset’s value. This helps match the expense of using an asset with the revenue it helps to generate.  

What is a depreciation journal entry?

A depreciation journal entry records the reduction in value of a fixed asset each period throughout its useful life. These journal entries debit the depreciation expense account and credit the accumulated depreciation account, reducing the book value of the asset over time.  

Accounting for depreciation provides an accurate picture of a company's financial status by aligning the cost of an asset with the periods in which it generates revenue.

What is accumulated depreciation?

Accumulated depreciation records the cumulative depreciation expense of a fixed asset over its useful life. Accumulated depreciation is a contra-asset account that offsets the cost of an asset on the balance sheet, showing its reduced book value.

Importance of depreciation expense journal entries

Depreciation journal entries allow you to keep an accurate record of your fixed assets. They help provide:

• Accurate financial reporting: Recording depreciation creates a fair representation of each asset’s worth, making financial statements accurate and reliable.

• Matching principle: Depreciation follows the matching principle in accounting, which aligns the cost of an asset to the period in which it generates revenue.

• Tax deductions: Depreciation can impact a company's tax liability because it’s a non-cash expense that reduces taxable income.

• Asset replacement planning: Recording depreciation helps businesses plan for asset replacements, so you won’t be surprised by unexpected asset costs.  

How to calculate and record depreciation journal entries

Before you create your depreciation journal entry, you need to follow a few steps to calculate the expense:  

1. Gather data

To calculate depreciation expenses for your assets, you need the following information:

• Asset cost: The original purchase price of the asset

• Useful life: The estimated time the asset will be useful to the business

• Salvage value: The estimated value of the asset at the end of its useful life

2. Choose a depreciation method

Next, choose a deprecation method for the asset. Methods can vary based on the asset type and how it wears out over time. These are some of the most used methods:  

• Straight-line depreciation: Allocates an equal amount of depreciation over the asset's useful life

• Declining balance depreciation: Allocates higher depreciation expenses in the early years of the asset's life  

• Units of production depreciation: Calculates depreciation based on the asset's usage or output instead of time  

• Sum-of-the-years’ digits depreciation: Allocates higher depreciation expenses in the early years of usage, using a fraction based on the sum of the asset's useful life digits

3. Calculate the depreciation expense

Once you have your data and chosen depreciation method, use the corresponding formula to calculate the annual depreciation expense.  

For example, if you choose straight-line depreciation, the formula is: (asset cost - salvage value) / useful life.  (We’ll look at a more in-depth example below.)

Now you’re ready to record the depreciation journal entries for the period.  

4. Record the journal entries

Record the depreciation expense journal entries as follows:

• Debit depreciation expense on your income statement: This journal entry represents the cost of using the asset for the period.

• Credit accumulated depreciation on the balance sheet: This journal entry increases the accumulated depreciation account, reducing the asset's book value.

Depreciation expense journal entry example

Now that we know the process, let’s go over an example of a depreciation journal entry.  

Let’s say your business purchased office furniture for $12,000 on January 1. The equipment has a useful life of 5 years and a $2,000 salvage value. You’ve chosen the straight-line depreciation method, which allocates the cost evenly over the asset’s useful life.

First, let’s calculate the annual depreciation expense using the straight-line depreciation formula: (asset cost - salvage value) / useful life.

(12,000 – 2,000) / 5 years = $2,000 per year

Now that we have our annual depreciation expense, let’s make the depreciation journal entries for the end of the year:

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Impact of depreciation on financial statements

As you can see in the example above, depreciation impacts various accounts and financial statements. Let’s take a closer look at the impact:  

• Balance sheet: Depreciation reduces the book value of assets while increasing the accumulated depreciation account. As a result, the net worth or the total assets of the company decreases over time, reflecting the gradual usage of assets.

• Income statement: Depreciation is recorded as an expense, reducing the company's overall profits. Although it's a non-cash expense, it affects net income, contributing to a more accurate depiction of a company's profitability.

• Cash flow statement: Depreciation is added back to the net income in the operating activities section of the cash flow statement. This adjustment ensures that only cash flows are reflected in this statement, presenting a more accurate view of the company's liquidity.

Learn more about depreciation journal entries  

Find the answers to commonly asked questions about depreciation journal entries.  

What is the difference between depreciation expense and accumulated depreciation?

A depreciation expense represents the portion of an asset's value allocated as an expense in a particular accounting period. Accumulated depreciation, on the other hand, is the total amount of depreciation recorded for an asset over its useful life.  

Where is depreciation recorded on the balance sheet?

Depreciation is indirectly represented on the balance sheet through the accumulated depreciation account. This is a contra-asset account, deducted from the corresponding asset's value. The carrying value of the asset (cost minus accumulated depreciation) is presented on the balance sheet as a separate line item.

How do changes in useful life or salvage value impact a depreciation journal entry?

If the useful life is extended or salvage value changes, you may need to revise the depreciation expense calculations. The revised calculations would then be reflected in the subsequent journal entries.

Making these adjustments manually can be time-consuming. Fixed asset accounting software can make it easier with automated depreciation schedules.  

What happens if an asset's value increases after its initial recognition and depreciation?

If an asset's value increases, the increase in value is not reflected in the depreciation journal entry. Instead, the increase is recorded separately, typically as a revaluation or appreciation, to reflect the asset's new fair value. The depreciation calculations continue based on the original cost and remaining useful life.

Simplify asset depreciation with NetAsset

Depreciation is vital to accounting for your company’s fixed assets correctly. But it doesn’t have to be complicated.  

While fixed asset spreadsheets can quickly become unmanageable as your asset portfolio grows, the right software can make the process more efficient with automated depreciation schedules and centralized data.  

NetAsset (available for NetSuite or any ERP) is a user-friendly fixed asset management solution created to simplify the entire fixed asset lifecycle, from asset creation to tax reporting.  

It saves accounting teams valuable time by simplifying complex calculations and reducing manual errors, giving you confidence in your financial reports.  

Take a self-guided tour of NetAsset to discover how it can transform your fixed asset management processes.