Illustration of a glamorous woman in a silver gown on a red carpet with vintage cars and palm trees in the background, symbolizing brand value and reputation as intangible assets

Every business out there—yes, even yours—relies on two kinds of assets: tangible and intangible. Think of tangibles as the stuff you can kick if you’re having a bad day (like that stubborn printer), and intangibles as the stuff you can’t touch but still make money (hello, brand reputation!). These assets are your business’s trusty sidekicks, helping you generate revenue, smooth out daily operations, and keep those annoying expenses in check.

But here’s the ugly truth: most of your beloved fixed assets (except for land—we’ll get to that diva later) start losing their mojo the second you bring them into the fold. Whether it’s due to the relentless march of time or that enthusiastic “wear and tear” from everyday use, their value declines faster than last season’s fashion trends. So, what does this mean for you? It’s time to roll up your sleeves and dive into making an adjusting entry for depreciation. Trust us, your balance sheet will thank you.

Read about: Types of adjusting entries with examples

What is the Adjusting Entry for Depreciation?

Alright, let’s cut to the chase. The adjusting entry for depreciation is like admitting that your once shiny asset isn’t so shiny anymore. It’s a journal entry that records the decrease in value of a fixed asset over its useful lifespan. In plain English? It’s how you keep your financials honest and avoid living in a fantasy where assets never age.

This journal entry typically involves two key accounts:

  • Debit to Depreciation Expense: This increases your expenses for the period because, hey, assets don’t depreciate for free.
  • Credit to Accumulated Depreciation: This is the total amount of depreciation that has accumulated over time, reducing the book value of your assets.

By making this adjusting entry, you’re ensuring that your income statement and balance sheet are as accurate as that spreadsheet you obsessively tweak (we know you do). It’s all about matching the cost of using an asset to generate revenue, keeping everything on the up and up.

Need more convincing? Imagine if you didn’t account for depreciation. Your expenses would be understated, profits overstated, and you’d look more profitable on paper than you actually are. Sounds like a recipe for disaster—or at least a very awkward conversation with your accountant.

Illustration of a smiling coin using a calculator, symbolizing financial management and asset depreciation

Read about: Adjusting entry for unearned revenue

Making Adjusting Entries for Depreciation

So, you’re ready to dive into the thrilling world of depreciation adjusting entries? Grab a coffee (or something stronger), and let’s get to it. Here’s the step-by-step guide to making that all-important adjusting entry:

  1. Determine the Asset’s Cost: This isn’t just the sticker price. Include all those sneaky extra costs like taxes, shipping, and installation fees. If you bought a computer for $5,000 and paid $500 in taxes, your total cost is $5,500. No shortcuts here!
  2. Figure Out the Salvage Value: This is how much you expect to get when you finally say goodbye to the asset. Think of it as the trade-in value when you swap out your old phone for the latest model.
  3. Estimate the Useful Life Span: How long is this asset going to be useful to you? Be realistic—unlike that gym membership you never use, assets have a finite lifespan.
  4. Calculate Depreciation: Subtract the salvage value from the asset’s cost, then divide by its useful life span. Voilà! You’ve got your annual depreciation expense.
  5. Make the Adjusting Entry: Debit the depreciation expense account and credit the accumulated depreciation account. Pat yourself on the back—you’ve just mastered the basics of depreciation accounting!

Do you make adjusting entries for depreciation?

Yes, indeed! Adjusting entries for depreciation are like the dentist appointments of accounting—you might not love them, but you have to do them regularly (usually at the end of each accounting cycle) to keep everything healthy. They ensure that your financial statements accurately reflect the gradual loss in value of your assets over time.

Read about: Why are adjusting entries necessary?

How Do You Record Adjusting Entries for Depreciation?

Recording the adjusting entry for depreciation isn’t as daunting as it sounds. Here’s how you do it:

You make a journal entry that:

  • Debits Depreciation Expense: Increases your expenses for the period.
  • Credits Accumulated Depreciation: Increases the total depreciation recorded against the asset.

This action reflects the asset’s declining value on your books. Here’s what the entry looks like:

DateAccount NameDebitCredit
DD/MM/YYYYDepreciation Expense$$
Accumulated Depreciation$$

By doing this, you’re increasing both your depreciation expense (which hits your income statement) and your accumulated depreciation (which adjusts your balance sheet). It’s a double whammy of financial accuracy!

Examples of Adjusting Entries for Depreciation

Illustration of a woman in a pottery shop arranging colorful ceramic cups and bowls

Example 1

Let’s say our friend Ben’s logistics company buys a shiny new delivery van on January 1, 2023, for $60,000. The van has a salvage value of $10,000 and a useful life of 5 years. Here’s how we calculate the annual depreciation:

Depreciation = (Cost of Asset – Salvage Value) ÷ Useful Life

Depreciation = ($60,000 – $10,000) ÷ 5

Depreciation = $50,000 ÷ 5

Depreciation = $10,000 per year

So, each year, Ben needs to make the following adjusting entry:

DateAccount NameDebitCredit
01/01/2024Depreciation Expense$10,000
Accumulated Depreciation$10,000

Example 2

Now, let’s switch gears to Alice, who runs a ceramics store. She buys a new oven on March 1, 2023, for $8,000. The equipment has a salvage value of $1,000 and a useful life of 3 years. Let’s crunch the numbers:

Depreciation = (Cost of Asset – Salvage Value) ÷ Useful Life

Depreciation = ($8,000 – $1,000) ÷ 3

Depreciation = $7,000 ÷ 3

Depreciation = $2,333.33 per year

DateAccount NameDebitCredit
01/04/2023Depreciation Expense$2,333.33
Accumulated Depreciation$2,333.33

If Alice wants to make monthly adjusting entries (because she’s on top of her game), she’ll divide the annual depreciation by 12:

Monthly Depreciation = $2,333.33 ÷ 12

Monthly Depreciation = $194.44

Her monthly adjusting entry starting April 1, 2023, would be:

DateAccount NameDebitCredit
01/04/2023Depreciation Expense$194.44
Accumulated Depreciation$194.44

Read about: Adjusting entries for supplies

Takeaways

Tri-panel image showing the aging process of delivery vans from 1994, 1922, and 2043, each in different states of wear and depicted in vibrant, differing backdrops.

There you have it—the not-so-scary world of adjusting entries for depreciation. Making these entries ensures your financial statements aren’t living in la-la land and accurately reflect the current state of your assets. Remember, while land might be the exception to the depreciation rule (fancy, huh?), most assets aren’t so lucky.

In the U.S., the IRS has laid down the law on how to handle depreciation, usually through the Modified Accelerated Cost Recovery System (MACRS). Whether you’re using straight-line depreciation like we did here or opting for the double-declining balance method for assets that lose value faster than a new car off the lot, the key is consistency and accuracy.

So next time you’re tempted to skip that depreciation entry because “it’s just a small asset,” remember this guide—and the potential mess you’d be making of your financial statements. Stay sharp, keep your books in order, and may your assets be ever in your favor!

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