Depreciation journal entries: how to record depreciation, with examples

Depreciation is recorded with an adjusting journal entry. No cash changes hands, but part of an asset's cost moves from the balance sheet to the income statement. The entry has the same shape whatever depreciation method you use; only the amount changes. Disposals take a second, slightly longer entry, and that is where most of the mistakes happen.

The depreciation journal entry

Debit Depreciation Expense and credit Accumulated Depreciation for the period's depreciation. The Federal Reserve's property and equipment accounting manual records it the same way, "debiting current expense and crediting the related allowance for depreciation." Allowance for depreciation is another name for accumulated depreciation.

Take a $12,000 commercial mower expected to last five years, with a $2,000 salvage value. Straight-line depreciation is $2,000 a year, and the entry at December 31 is:

A memo such as "Depreciation, commercial mower, year 1" keeps the entry traceable to the schedule.

• The debit puts the year's share of the cost on the income statement. Depreciation expense is closed out at year end and starts again at zero.
• The credit goes to a contra-asset account, not to the Equipment account. Equipment stays at $12,000 for as long as the business owns the mower, and accumulated depreciation grows beside it until the two are removed together.

Crediting the asset account directly would get the net figure right and lose the history: you could no longer see what the asset cost or how much of that cost has been expensed.

From purchase to retirement

Here is the mower's whole life in the ledger:

After five years, accumulated depreciation is $10,000 and the net book value is the $2,000 salvage estimate. Scrapping the mower for nothing turns that remaining book value into a loss.

Monthly, quarterly or yearly entries

The entry is the same at any frequency; only the amount is scaled. Monthly depreciation on the mower is $2,000 ÷ 12 = $166.67, with the last month of each year absorbing the rounding so the year totals $2,000.

Businesses that only produce annual accounts often post one adjusting entry at year end. Those that produce monthly financial statements post monthly, so each month carries its share of the cost.

Partial years

An asset rarely arrives on the first day of the year, so its first entry covers part of a year. Which part depends on the convention in your accounting policy:

The Federal Reserve manual uses the second: "depreciation starts the month following when the fixed asset is placed into service." Tax depreciation under MACRS has conventions of its own, set out in IRS Publication 946. For the books, choose one convention, write it into your policy, and apply it to every asset. The total depreciation over the asset's life is the same; only the timing moves.

One entry per asset, or one per category

You do not need a journal line for every asset. Most businesses post one entry per asset category, such as vehicles, equipment and computers, using the totals from their fixed asset depreciation schedule, and keep the asset-by-asset detail in the schedule or register. What matters is that the register's accumulated depreciation for each category agrees with the matching accumulated depreciation account in the ledger.

Journal entries for selling or retiring an asset

When an asset leaves the business, both its cost and its accumulated depreciation come off the books. The Federal Reserve manual describes the same steps: deduct "the gross asset value and the related accumulated depreciation," and record the difference between net book value and the proceeds as a gain or loss.

Before you record any disposal, bring depreciation up to date. If the asset is sold partway through a year, post depreciation for the months it was in use first, so the disposal is measured against the right book value.

The examples below use a delivery van that cost $42,000 and depreciates by $6,000 a year. At the end of year four it has $24,000 of accumulated depreciation and a net book value of $18,000.

Sold at a gain

The van sells for $21,000, which is $3,000 above its book value:

Sold at a loss

The van sells for $14,000, which is $4,000 below its book value:

Written off with nothing received

The van is written off after an accident with no recovery, so its whole $18,000 book value becomes a loss:

Sold partway through a year

If the van is sold on March 31 of year five for $17,000, first record three months of depreciation, $6,000 × 3 ÷ 12 = $1,500:

Accumulated depreciation is now $25,500 and the book value $16,500, so the sale books a $500 gain:

Skip the first entry and the sale shows a $1,000 loss instead: the same total effect on profit, with three months of depreciation misreported as a loss on disposal.

Trading in for a replacement

A trade-in is a disposal and a purchase at once. Treat the trade-in allowance like sale proceeds when you work out the gain or loss on the old asset, and record the new asset as its own purchase. The Federal Reserve manual takes the difference to expense when the old asset's book value exceeds the trade-in allowance. If the allowance looks inflated against the price of the new asset, ask your accountant how to value the exchange.

Fully depreciated assets

Once an asset's accumulated depreciation reaches its cost less salvage, stop posting depreciation for it. It stays on the books, with its cost and accumulated depreciation, until it is retired. The mower at the end of year five is in that position: scrapping it for nothing books the $2,000 salvage value as a loss, and selling it for $2,500 books a $500 gain. The fully depreciated assets guide covers what to check before you retire one.

Common mistakes

How AssetCenter fits

AssetCenter's fixed asset management software produces the figures these entries need. Its depreciation report shows each asset's current-year depreciation, accumulated depreciation and net book value, by straight-line, double-declining balance, 150% declining balance, sum-of-years' digits or MACRS. The month of purchase counts as a full month and the first and last years are prorated from there, the figures can follow your fiscal year, and the report exports to Excel so your bookkeeper can total it by category.

It also records the event that triggers a disposal entry. Decommissioning an asset as Sold, Retired, Recycled, Lost or Stolen keeps its history and costs in your reports, and the depreciation report can be filtered by those statuses. AssetCenter does not post journal entries, keep separate tax and book records, or replace your general ledger; your bookkeeper posts the entries from its figures.

Frequently asked questions

Is depreciation a debit or a credit?

Both sides appear in the entry. Depreciation expense is debited, and accumulated depreciation, the contra-asset account, is credited.

What is the adjusting entry for depreciation?

It is the same entry, recorded at the end of a period to bring the books up to date before the financial statements are prepared: debit Depreciation Expense, credit Accumulated Depreciation.

Does depreciation affect cash?

No. The entry moves cost from the balance sheet to the income statement without any cash changing hands. The cash went out when the asset was bought.

Do you record depreciation on land?

No. Land is not depreciated, so it never gets a depreciation entry. Buildings and land improvements are depreciated separately from the land they sit on.

Next step

Take one period's figures from your fixed asset depreciation schedule and post the entry by category. Then compare each accumulated depreciation account in the ledger with the register's total for that category. If they differ, look for a disposal recorded in one place and not the other, and use the asset disposal checklist to close it out.

By Jeremy Francis

Founder & CEO, AssetCenter