Depreciation Expense Journal Entry
Depreciation is an allocation of the cost of tangible assets over its estimated useful life. Likewise, depreciation expense represents the cost that incurs during the period as the company uses the asset in the business. Hence, the company needs to make proper journal entry for the depreciation expense at the period-end adjusting entry.
The company usually cannot tell exactly how long the asset will be used. Hence, it can only estimate the amount of depreciation expenses during the period by using various depreciation methods. However, whichever method is used, the depreciation expense should match with the benefits that the assets provide to the company over the periods of time.
At the end of the accounting period, the journal entry of depreciation expense is necessary for the company to have the actual net book value of total assets on the balance sheet. At the same time, it is to recognize the expense that incurs with the usage of the asset during the period.
Depreciation expense journal entry
The company can make depreciation expense journal entry by debiting the depreciation expense account and crediting the accumulated depreciation account.
Accumulated depreciation is a contra account to fixed assets. It is a balance sheet item which its normal balance is on the credit side. Likewise, when a fixed asset is fully depreciated, the accumulated depreciation of that asset equals its total cost. In other words, the net fixed asset value is zero when that time comes.
Depreciation expense is an income statement item that represents the expense that incurs as the company uses the asset during the accounting period. In this case, the depreciation expense should match the economic benefit that the asset brings to the company.
For example, on June 01, 2020, the company ABC Ltd. buys and makes a proper record of a $1,770 computer for office use and it is put to use immediately after the purchase. The computer’s estimated useful life is 3 years with a salvage value of $150. ABC uses the straight-line depreciation method for the computer.
What is the journal entry for the computer’s depreciation expense in the June 30 adjusting entry?
With the information in the example above, we can calculate the monthly depreciation expense as below:
Depreciation expense = ($1,770 – $150) / (3 x 12) = $45 per month
In this case, we can make the journal entry of depreciation expenses in the June 30 adjusting entry as below:
This journal entry is necessary for the company to present an actual net book value of its total assets as well as a more realistic view of its profit in June 2020. Without this journal entry of depreciation expense, total assets on the balance sheet will be overstated by $45 while total expenses on the income statement will be understated by $45 in June 2020.