Accumulated Depreciation Journal Entry Meaning
An accumulated depreciation journal entry is the journal entry passed by the company at the end of the year. It is done to adjust the book values of the different capital assets of the company and adding the depreciation expense of the current year to the accumulated depreciation account where the depreciation expenses account will be debited. The accumulated depreciation account will be credited in the books of accounts of the company.
Recording Journal Entry of Accumulated Depreciation
At the end of every year, fixed assets of the companyFixed Assets Of The CompanyFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more are depreciated by charging the depreciation expenses. This depreciation expense adds the balance of the accumulated depreciationAccumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset's purchase price and its carrying value on the balance sheet.read more account. It does not directly credit the cost of the respective asset because, as per the requirement of the accounting standards, companies require to show the cost as well as the related accumulated depreciation of the fixed asset in the financial statements of the companyFinancial Statements Of The CompanyFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more.
To record such depreciation on the fixed assets in the books of accounts of the company, depreciation expenses account is debited, and the accumulated depreciation account is credited. The entry to record accumulated depreciation is as below:
| Particulars | Dr ($) | Cr ($) |
|---|---|---|
| Depreciation Expense A/C …..Dr | XXX | |
| To Accumulated Depreciation A/C | XXX |
Now, when the company sells or disposes of the asset, then this balance of the accumulated depreciation account will be written off along with the cost of the asset. The entry to record the same is as follows:
| Particulars | Dr ($) | Cr ($) |
|---|---|---|
| Particulars | Dr ($) | Cr ($) |
| Accumulated Depreciation A/C …..Dr | XXX | |
| To Asset A/C | XXX |
Example of Accumulated Depreciation Journal Entry
There is a company, A ltd having the plant and machinery. At the beginning of the accounting year 2018, the balance of the plant and machinery account was $7,000,000, and the balance of the accumulated depreciation account was $3,000,000. During the year, no purchases and sales were made by the company concerning its plant and machinery. Using the straight-line methodStraight-line MethodStraight Line Depreciation Method is one of the most popular methods of depreciation where the asset uniformly depreciates over its useful life and the cost of the asset is evenly spread over its useful and functional life. read more every year company charges depreciation of $1,000,000 in the books of accounts.
Pass the necessary journal entry in the company’s books of accounts to record the depreciation and accumulated depreciation at the end of the accounting year 2018?
Solution:https://www.wallstreetmojo.com/straight-line-depreciation-method-formula/
The depreciation expense of the company for the current year is $1,000,000 as per the straight-line method. In the year there were no purchases and sales were made by the company concerning its plant and machinery, so no adjustments are required to be made. At the end of the accounting year entry to record the depreciation and accumulated depreciation is as follows:
Advantages
The different advantages related to the accumulated depreciation journal entry are as follows:
- It helps in recording all the transactions involving the depreciation of all of the fixed assets of the company thereby keeping track of the same;
- The accumulated depreciation journal entry credits the accumulated depreciation account every year with the yearly depreciation figure, the balance of which is shown in the financial statements of the company. This company can get to know the amount of the total depreciation expense which already has been charged by the company on its assets since its purchase date;
Disadvantages
The different disadvantages related to the accumulated depreciation journal entry are as follows:
- For the companies having a large number of assets, it becomes time-consuming to record every entry related to the accumulated depreciation.
- As there is the involvement of the humans for recording the accumulated depreciation journal entry, there are chances of error in it.
Important Points
The different important points are as follows:
- Accumulated depreciation is the contra asset accountContra Asset AccountA contra asset account is an asset account with a credit balance related to one of the assets with a debit balance. When we add the balances of these two assets, we will get the net book value or carrying value of the assets having a debit balance.read more, i.e., an asset account having the credit balanceCredit BalanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account. Usually, Liability accounts, Revenue accounts, Equity Accounts, Contra-Expense & Contra-Asset accounts tend to have the credit balance. read more, which adjusts the book value of capital assets.
- Accumulated depreciation balance shows the amount of the total depreciation expense, which has already been charged by the company on its assets since its purchase date. The balance of the accumulated depreciation account increases every year with the depreciation charge of the current year. To record the same, depreciation expenses account will be debited, and the accumulated depreciation account will be credited in the books of accounts of the company.
- The yearly depreciation expense adds the balance of the accumulated depreciation account. It does not directly credit the cost of the respective asset because, as per the requirement of the accounting standards, companies are required to show the cost of the fixed assets as well as the related accumulated depreciation of that asset in the financial statements of the company.
- Every year as the entry is passed to record the accumulated depreciation, the balance of the accumulated depreciation account increases, which leads to the decrease in book value of fixed assets of the company until the book value of the assetBook Value Of The AssetBook Value of Assets is the asset's value in the books of records of a company or an institution at any given instance. Assets Book Value Formula = Total Value of an Asset – Depreciation – Other Expenses Directly Related to it read more becomes zero. Once the balance of the asset accountAsset AccountAsset Accounts are one of the categories in the General Ledger Accounts holding all the credit & debit details of a Company’s assets. The examples include Short-Term Investments, Prepaid Expenses, Supplies, Land, equipment, furniture & fixtures etc. read more becomes zero, then further no entry concerning the accumulated depreciation of that asset will be passed as the accumulated depreciation account balance cannot be more than that of the balance of the respective asset account.
Conclusion
Thus the accumulated depreciation journal entries are recorded in the company’s books of accounts when depreciation expenses account will be debited, and the accumulated depreciation account will be credited. They credit the accumulated depreciation account every year with the yearly depreciation figure, the balance of which is shown in the financial statements of the company. By this, the company gets to know the total depreciation expense which has been charged by the company on its assets since its purchase, thereby helping the concerned person in keeping track of the same.
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