Journal entry for depreciation charged on building
Introduction
In business, if we have a building of our own for our company, we need to record its value as well as its deterioration which is called depreciation that is charged on the building in our accounting book. If this is the case, we need to make the journal entry for depreciation charged on the building at end of the period in order to account for the depreciation charged as well as to update the net book value of the building itself.
Depreciation is an allocation of cost on an asset over its useful life. In this case, the depreciation charged on the building is the allocated cost that is charged to the income statement as an expense during the accounting period.
In accounting, we need to record the deprecation that is charged on the fixed asset in order to follow the matching principle of accounting. That is why there are several depreciation methods that are applied to different types of fixed assets.
However, we usually use the straight-line depreciation method in order to determine the depreciation charged on the building. This is due to the benefits that we receive from the building from one period to another is usually similar until it reaches the end of its useful life.
Journal entry for depreciation charged on building
We can make the journal entry for depreciation charged on building by debiting the depreciation expense account and crediting the accumulated depreciation account.
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | ### | |
| Accumulated depreciation – building | ### |
In this journal entry, the accumulated depreciation account is a contra account to the building asset in which its normal balance is on the credit side. Likewise, this journal entry will decrease total assets on the balance sheet and increase total expenses on the income statement.
Depreciation charged on building example
For example, on January 1, we have purchased an office building to use for our business operation. This building that we have purchased for $200,000 is ready to use immediately, hence we can calculate the depreciation starting from January 1.
We estimate this building to have a useful life of 10 years and we use the straight-line depreciation method for building and office equipment in our company.
The end of the accounting period in our company is on December 31.
In this case, on December 31, we can make the journal entry for depreciation charged on the building by debiting the amount of $20,000 ($200,000 / 10) into the depreciation expense account and crediting the same amount into the accumulated depreciation account as below:
December 31:
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | 20,000 | |
| Accumulated depreciation – building | 20,000 |
After this journal entry, the net book value of the building that we have purchased for $200,000 on January 1, will be reduced to $180,000 ($200,000 – $20,000) as of December 31, at the end of our accounting period.
Calculate depreciation charged on building with straight-line
We can calculate the depreciation charged on the building with the straight-line depreciation method by using the cost of the building to divide with its useful life.
Depreciation charged on building = Cost of building / Useful life
For example, if we look at the scenario in the example above, we calculate the yearly depreciation of the building by dividing its $200,000 cost by the 10 years of its useful life.
Depreciation charged on building = $200,000 / 10 years = $20,000 per year
Likewise, we can determine that the depreciation charged on the building above is $20,000 per year. That is why we have the debit of $20,000 depreciation expense and the credit of accumulated depreciation with the same amount as in the journal entry on December 31 above.