Depreciation Entry In Accounting: Meaning, Examples, How To Calculate It

Are you confused about the calculation of the depreciation entry in Accounting? If yes, you must read this article until the end to have a clear insight into it. Depreciation of the journal entry is one of the biggest pillars of accounting that helps you understand your assets’ present status.

Students often get stuck at the time of calculation of depreciation. So, all your queries will be sorted once you know the entire process of calculation of depreciation. This article can make this concept easier for you to understand.

Depreciation entry in accounting can help you make the correct calculation in the right order. Here, proper calculation can make things work perfectly well for you.

What Is Depreciation Entry In Accounting?

A Depreciation Entry in accounting is a journal entry that records the reduction in value of a fixed asset over time due to wear and tear, obsolescence, or usage. This helps businesses allocate the cost of an asset over its useful life instead of expensing it all at once.

It helps to understand the actual value of the fixed assets over a particular period of time. A depreciation expense is the total amount for which each asset value is calculated. Accounting for depreciation offers an accurate picture of the company’s financial status over a particular period.

What Is The Journal Entry For Depreciation?

If you want to know about the process of depreciation then you must go through the journal entries of depreciation to have a clear insight into it.

Example Of Depreciation

If you want to know the method of depreciation calculation then you must go through the above example to have a clear insight into it. Additionally, it will assist you in clarifying the doubts of depreciation to a greater extent.

Different Methods For Calculation Of Depreciation

There are different methods you can employ to calculate the depreciation of your assets. However, basically, there are five methods of depreciation that you should get through. Some of the essential methods that you should take into consideration, especially while making a depreciation entry in accounting, are as follows:–

1. Straight Line Method

The Straight Line Method (SLM) of depreciation is a common way to divide the cost of an asset evenly over its useful life. Under this method, the same amount of depreciation expense is charged each year until the asset reaches its residual (or salvage) value.

Formula For Calculation Of Straight Line Depreciation

Annual Depreciation= (Cost Of Asset – Salvage Value) / Useful life

Points to remember for the calculation of Straight line depreciation

• Depreciation is the same amount every year.
• Simply as well as widely used.

Example:-

A machine costs ₹60,000, has a salvage value of ₹6,000, and a useful life of 5 years.

Annual Depreciation = 60000-6000/5 = 10,800

Journal entries that you need to pass for straight-line methods of depreciation are as follows:-

Depreciation Expense a/c —————- Dr 10,800

Accumulated Depreciation a/c ———- Cr 10,800

2. Diminishing Balance Method

The Diminishing Balance Method (or Written Down Value (WDV) Method) is a depreciation technique where a fixed percentage is applied to the book value (remaining value) of the asset each year. This results in higher depreciation in the earlier years and lower depreciation in the later years of an asset’s life.

Formula For Calculation Of Diminishing Balance Method

Depreciation=Book Value×Depreciation Rate

Points To Remember before the calculation of diminishing balance methods:-

• The higher the level of depreciation in earlier years lower will be in the later years.
• It is best for those types of assets that lose the value quickly.

Example:-

If an asset costs Rs 60000 and the depreciation is 20% per year

• Year -1 Rs 60000 x 20% = 12000
• In The Year-2 Rs (60000- 12000) =48000 x20% = 9600
• Year -3 Rs ( 48000- 9600) = 38400 x 20% = 7680

And so on ———

This is the process for the calculation of depreciation under the diminishing balance method.

3. Units Of Production Method

The Units of Production Method helps in the calculation of depreciation based on the actual usage or output of an asset rather than time. This method is useful for machinery, vehicles, or equipment where depreciation depends on the number of units produced or hours used.

Formula For Calculation of Units Of Production Method

Depreciation Per unit = (Cost of Assets – Salvage Value)/ Total Estimated Unit

Depreciation expense = depreciation per unit x units produced.

Points To Remember before the calculation of Unit Production methods:-

• Best of machines or all the vehicles whose usage varies directly.
• Depreciation depends on actual usage, not on time.

Examples:-

A truck costs ₹10,00,000 with a salvage value of ₹2,00,000 and is expected to run 1,00,000 km. If it runs 20,000 km in a year:

Depreciation Per KM= (10,00,000- 2,00,000) = 800000/100000 = 8 per km.

Depreciation Expense = 20000 x 8 = 160000

4. Sum Of The Years Digits Method

The Sum of the Years’ Digits (SYD) Method is an increased method of depreciation that allocates higher depreciation expenses in the early years of an asset’s life and gradually decreases the expense over time. This method is useful for assets that lose value more quickly in their initial years.

Formula For Calculation of Sum Of The Years Digits Method

Depreciation = Remaining Life Of An Asset – x (Cost – Salvage value)

Sum Of the year’s digits

Points To Remember before the calculation of years digits methods

• Higher depreciation in earlier years, like WDV.
• Best for assets that lose value faster initially.
• Year -1 5/15 x depreciable amount.
• Year -2 4/15 x depreciable amount.

And so on ………

5. Double Declining Balance Method

The Double Declining Balance (DDB) Method is an accelerated method of depreciation that uses twice the straight-line depreciation rate to the book value of the asset each year. This results in higher depreciation in the early years and lower depreciation in later years.

Formula For The Calculation Of Double Declining Balance Method

Depreciation = 2x(1/ useful life) x book value

Points To Remember Before The Calculation Of Double Declining Balance Method

• Higher depreciation in earlier years.
• Lower depreciation in later years.
• Good for technology, electronics, and machinery that lose value quickly.
• Asset value never fully reaches zero (manual adjustment may be needed)

Examples of Double declining Balance method

• Straight Line Depreciation rate:- ⅕ =20%

• Double declining rate= 20%x2 = 40%

Which Methods Should You Employ?

There are certain methods you can use or employ while calculating depreciation in accounting. Some of the core factors that you should consider here are as follows:-

What Is Accumulated Depreciation?

Accumulated Depreciation is the total depreciation recorded on an asset since it was purchased. It represents the reduction in the asset’s value over time and is recorded as a contra-asset account on the Balance Sheet.

Key Features Of Accumulated Depreciation

There are certain key features of accumulated depreciation that you must be well aware of. Some of the core features of it are as follows:-

• It increases over time as all the depreciation is recorded each year.
• Another core feature of accumulated depreciation is that it does not affect the original cost but reduces the book value of assets.
• It stops accumulating when all the assets reach its useful life whenever it is sold.
• In most cases, it appears under the fixed assets on your balance sheet as a deduction.

Formula Of Accumulated Depreciation

Example Of Accumulated Depreciation

A company purchases all the machines for Rs 200000 with a useful life of 5 years and it makes use of the straight-line method.

1. Annual Depreciation calculation = 200000/5= 40000 per year.

2. Accumulated Depreciation over the 5 years:

Depreciation expense———————– Dr 40000

To Accumulated Depreciation———————–Cr 40000

Importance For The Calculation Of Depreciation Journal Entries

Depreciation of the journal entries allows you to keep accurate and perfect records of all the transactions that comprise the fixed assets. Understanding the depreciation entry in accounting is essential for maintaining these records properly. In this article, you will get to know the importance of the calculation of depreciation in detail.

1. Helps In Accurate Financial Reporting

Depreciation ensures that a company’s financial statements reflect the true value of its assets over time. Without it, the balance sheet would overstate asset values, and the income statement wouldn’t accurately show the expense of using those assets. Depreciation entry in accounting helps you make the accurate calculation of the financial position of any business.

2. Matching Principle

In accounting, the matching principle requires expenses to be recorded in the same period as the revenue they help generate. Depreciation spreads the cost of an asset across the periods it’s used, aligning expenses with income. Thus you need to match all the expenses with the income you generate.

3. Tax Compliance

Depreciation affects taxable income. Many tax authorities allow businesses to deduct depreciation as an expense, reducing their tax liability. Proper journal entries ensure compliance with tax laws and regulations. Depreciation entry in accounting can help you to maintain the tax laws with complete ease.

4. Budgeting & Planning

Knowing how much an asset depreciates helps businesses plan for replacements or upgrades. It provides insight into the asset’s declining value and future capital needs. The business will get the complete picture of which assets they need to update or upgrade over time.

5. Profitability Analysis

Depreciation impacts net income. By recording the depreciation entry in accounting correctly, management can assess the true profitability of operations without distortions from large, one-time asset purchases. Profitability analysis forms an essential part of depreciation entry in accounting as it can boost the scope of your business development to a greater level.

Format For The Calculation Of Depreciation

You just have to follow this simple format for the calculation of depreciation under its different methodology. Just the standard format for the calculation of depreciation under its different types are as follows:-

1. Straight Line Method

Annual Depreciation= (Cost Of Asset – Salvage Value)/ Useful Life

2. Declining Balance Method

Depreciation Expense=Book Value×Depreciation Rate

3. Sum Of Years Digits Method

Depreciation Expense= (Remaining Life Of An Asset – x (Cost – Salvage value))/Sum Of the year’s digits

4. Units Of Production Method

Depreciation Per unit = (Cost of Assets – Salvage Value)/Total Estimated Unit

Depreciation expense = depreciation per unit x units produced.

5. Double Declining Balance Method

Depreciation = 2x(1/ useful life) x book value

Impact Of Depreciation On Financial Statement

Depreciation creates a grave impact on the financial statement of an organization. You must go through the details to have a clear insight into it. Some of its core impacts are as follows:-

1. Impact On Income Statement

Depreciation is a non-cash expense that reduces net income. Higher depreciation reduces profits, while lower depreciation increases reported profits. Depreciation is included in operating expenses, affecting EBIT (Earnings Before Interest and Taxes). It can boost the scope of your brand development as depreciation entry in accounting will reflect the actual picture of your balance sheet.

2. Impact On Balance sheet

Depreciation decreases the book value of fixed assets over time. Accumulated depreciation is a contra-asset account that offsets fixed assets. As depreciation is a non-cash expense, it does not directly impact cash balances.

3. Impact On Cash Flow Statement

As depreciation is a non-cash expense, it is added back to the net income that is present in the operating cash flow section. Additionally, higher depreciation lowers taxable income, reducing tax expenses, which increases cash flow. However, depreciation does not directly affect cash, but it improves cash flow by reducing taxes.

Frequently Asked Questions

1. What Is The Distinction Between Accumulated Depreciation & Depreciation Expense?

There are some common points of differences between Accumulated Depreciation and depreciation expenses.

2. Where Is Depreciation Recorded In Balance Sheet?

In the balance sheet, depreciation appears under the assets section as Accumulated Depreciation, which is a contra-asset account that reduces the book value of fixed assets.

3. How Do Changes In Useful Life Or Salvage Life Impact Depreciation?

When a company changes the useful life or salvage value of an asset, it directly affects the annual depreciation expense and the remaining book value of the asset.

4. What Happens If Asset Value Increases After Its Initial Recognition and Depreciation Entry in Accounting?

Typically, assets are recorded at cost and depreciated over time. However, if an asset’s value increases after its initial recognition, accounting treatment depends on whether the asset is accounted for under the Cost Model or the Revaluation Model (as per IFRS & GAAP).

Final Take Away

Hence, these are some of the crucial facts that you must be well aware off while calculating the depreciation. Depreciation in accounting can make things easier for you to understand the current value of your assets.

You can share your views and comments in our comment box. This will help us to know your take on this matter. Here, proper and correct planning matters a lot. Without the knowledge of depreciation, you cannot make things happen in your favor.

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ICA Edu Skills Team

Working with businesses in diverse industries. I'm passionate about helping others understand and manage their finances effectively. This blog is where I share practical tips, insightful guides, and the latest updates on accounting, taxation, GST, TallyPrime, and advanced Excel. Feel free to ask questions, leave comments.

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