Depreciation Journal Entry

Definition

Depreciation is an accounting term used to describe the gradual reduction in the value of an asset over time due to wear and tear, obsolescence, or other factors. It is a non-cash expense that is recorded in the books of accounts to reflect the decrease in the value of an asset. A depreciation journal entry is a journal entry used to record the depreciation of an asset.

Example

For example, a company purchases a machine for $50,000. The company estimates that the machine will have a useful life of 5 years and a salvage value of $5,000. The company will record a depreciation expense of $9,000 each year for 5 years. The journal entry to record the depreciation expense for the first year would be as follows:

Depreciation Expense 9,000
Accumulated Depreciation 9,000

The journal entry to record the depreciation expense for the second year would be as follows:

Depreciation Expense 9,000
Accumulated Depreciation 18,000

Why it Matters

Depreciation journal entries are important for businesses to accurately reflect the value of their assets in their financial statements. By recording depreciation expenses, businesses can accurately reflect the decrease in the value of their assets over time. This helps businesses to make informed decisions about their assets and to plan for future investments. Additionally, recording depreciation expenses helps businesses to accurately calculate their taxable income.