Journal Entry for Accumulated Depreciation

Accumulated Depreciation is the fixed assets contra account that is presented on balance sheet, it reduces the cost of the fixed assets to the net book value.  Accumulated depreciation is the total depreciation of a fixed asset from the purchased date up to the reporting date.

When the company depreciates the fixed assets, it means they decrease the fixed assets balance and increase expense on income statement. However, the journal entry does not directly credit the assets account. But we credit another account called accumulated depreciation which is the fixed assets contra account. When we credit the accumulated depreciation account, it will reduce the fixed assets by the same amount as it is the credit balance. The total between the cost of fixed assets and accumulated depreciation is known as net book value. It is the balance that will impact the balance sheet.

When a company sells a fixed asset, they need to derecognize the asset’s cost and the accumulated depreciation. It will typically recognize any accumulated depreciation as part of the gain or loss on the sale.  This helps to ensure that the profit/loss from the sale is accurate and reflects the true value of the asset.

Depreciation is a decrease in the value of an asset and naturally follows its useful life. It is a systematic allocation of the depreciable amount (or carrying amount) over the periods that company uses the asset.

The term depreciation usually refers to fixed assets such as buildings, equipment, machinery, and so on. Depreciation expense represents a reduction in the book value of tangible assets. It transfers part of that book value into an expense. Depreciation is calculated based on various methods which depend on the company operation, accounting framework, and the tax law.

Depreciation expenses depend on the cost of fixed assets, residual value, useful life, and the method of depreciation. In this article, we will use the straight-line depreciation method to explain the concept of the accumulated depreciation journal entry.

Journal Entry for Accumulated Depreciation

Fixed assets are initially recognized when they are ready for use. It is also the time that company must start to depreciate the asset. For the straight-line method, we use the following formula:

Depreciation Expense = (FA Cost – FA Residual Value)/Useful life

The journal entry is debiting depreciation expense and credit accumulated depreciation.

The journal entry will increase expenses on the income statement. The accumulated depreciation will the fixed assets contra account on balance sheet.

When the company sale fixed assets, the accountant needs to remove fixed assets from the financial statement. They need to remove both cost and accumulated depreciation of the specific asset. It also records the cash received and gain/Loss on sale disposal.

Gain from disposal: it is the case when company sells fixed assets more than the net book value. It is the difference between sale proceed and net book value.

Loss from disposal: It is the case when company sells fixed assets at a lower price than the net book value. It is the difference between sale proceed and net book value.

The journal entry is debiting accumulated depreciation and credit fixed assets cost. The different sale and net book value is the gain/loss on sale disposal.

This transaction will remove a specific asset’s net book value by removing its cost & accumulated depreciation. If company sells at loss, we need to debit the loss on disposal rather than gain.

Journal Entry for Accumulated Depreciation Example

Company ABC purchases a car cost $ 120,000 on 01 Jan 202X. Management has estimated that the car will be able to use for 3 years without any residual value. At the end of the second year, company decides to sell the car for $ 50,000. Please prepare journal entries related to accumulated depreciation.

In this example, we will record the depreciation expense on a yearly basis. In real practice, we can record on a monthly basis.

On 01 Jan 202X, company purchase a car and estimate useful life of 3 years. So we have to allocate the cost to three years which is the depreciation expense.

Depreciation Expense = $ 120,000/3 years = $ 40,000 per year.

So at the end of 1^st year, company needs to make a journal entry by debiting depreciation expense $ 40,000 and credit accumulated depreciation $ 40,000.

Depreciation expense will present as an expense on income statement. The accumulated depreciation will decrease the value of the fixed asset by $ 40,000 on the reporting date.

On balance sheet, the accumulated depreciation will present as the contra account of fixed assets. The balance of car will present only $ 80,000 on the balance sheet.

At the end of 2^nd year, company must make a journal entry again by debiting depreciation expense $ 40,000 and accumulated depreciation $ 40,000.

Similar to the first year, company allocates the value of the fixed assets to the depreciation expense. We simply increase the accumulated depreciation to reduce the net book value.

By the end of 2^nd year, car net book value is only $ 40,000 ( $ 120,000 – $ 40,000 – $ 40,000) but it was sold for $ 50,000. It means the company gains $ 10,000 from selling this car. After selling, company needs to remove both cost and accumulated depreciation of the car.

Gain from disposal = Sale Proceed – Car Net book Value

= $ 50,000 – $ 40,000 = $ 10,000

The journal entry is debiting cash receive $ 50,000, accumulated depreciation $ 80,000 and credit cost $ 120,000, Gain on disposal $ 10,000.

This transaction needs to record cash received at $ 50,000 which is the amount that company receives from selling the car. Accumulated depreciation of $ 80,000 needs to remove from the balance as well as the cost of the car ($ 120,000). The difference between car net book value and sell amount is the gain from disposal.