Accumulated Depreciation Journal Entry

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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 add 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 to the company's books of accounts.

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Recording 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. 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 and the related accumulated depreciation of the fixed asset in the financial statements of the company.

The depreciation expenses account is debited, and the accumulated depreciation account is credited to record such depreciation on the fixed assets in the company's books of accounts. The entry to record accumulated depreciation is as below:

Particulars Dr ($)Cr ($)
Depreciation Expense A/C …..DrXXX 
           To Accumulated Depreciation A/C XXX

Now, when the company sells or disposes of the asset, this balance of the accumulated depreciation account will be written off along with the asset's cost. The entry to record the same is as follows:

Particulars Dr ($)Cr ($)
Particulars Dr ($)Cr ($)
Accumulated Depreciation A/C …..DrXXX 
           To  Asset A/C XXX

Example of Accumulated Depreciation Journal Entry

There is a company, A ltd having the plant and machinery. Using the straight-line method, the company charges depreciation of $1,000,000 in the books of accounts every year. 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, the company made no purchases and sales concerning its plant and machinery.

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 company's depreciation expense for the current year is $1,000,000 as per the straight-line method. In the year, the company made no purchases and sales 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:

Example

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 company's financial statements. 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:

  • It becomes time-consuming for companies with many assets to record every entry related to the accumulated depreciation.
  • As there is the involvement of the humans in 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.
  • The accumulated depreciation balance shows the amount of the total depreciation expense, which the company has already charged 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, the depreciation expenses account will be debited, and the accumulated depreciation account will be credited to the company's books of accounts.
  • The yearly depreciation expense adds to 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 and the related accumulated depreciation of that asset in the company's financial statements.
  • Every year as the entry is passed on recording the accumulated depreciation, the balance of the accumulated depreciation account increases, which leads to the decrease in the 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 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

They credit the accumulated depreciation account every year with the yearly depreciation figure, the balance of which is shown in the company's financial statements. Thus the accumulated depreciation journal entries are recorded in the company's books of accounts when the depreciation expenses account is debited, and the accumulated depreciation account will be credited. By this, the company gets to know the total depreciation expense charged by the company on its assets since its purchase, thereby helping the concerned person keep track of the same.