Accumulated Depreciation Journal Entry Meaning
Accumulated depreciation journal entry is the journal entry passed by the company at the end of the year in order 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 and the accumulated depreciation account will be credited in the books of accounts of the company.
Journal Entry of Accumulated Depreciation
At the end of every year, fixed assets of the company are depreciated by charging the depreciation expenses. This depreciation expense adds the balance of the accumulated depreciation account and 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.
In order 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:
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 in order to record the same is as follows:
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Example of Accumulated Depreciation Journal Entry
Let’s discuss an example of the 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 with respect to its plant and machinery. Using the straight-line method 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 in order to record the depreciation and accumulated depreciation at the end of the accounting year 2018?
Solution:
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 with respect to 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 of Accumulated Depreciation Journal Entry
The different advantages related to the accumulated depreciation journal entry are as follows:
- The accumulated depreciation journal entry 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 of the Accumulated Depreciation Journal Entry
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 each and every entry related to the accumulated depreciation.
- As there is 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 account i.e., an asset account having the credit balance which adjusts the book value of capital assets.
- Accumulated depreciation balance shows the amount of the total depreciation expense which already has 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. In order 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 and does not directly credit the cost of the respective asset because as per the requirement of the accounting standards, companies are required to show 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 asset becomes zero. Once the balance of the asset account becomes zero, then further no entry with respect to 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 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 and thereby helping the concerned person in keeping the track of the same.
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