Learning Outcomes
- Journalize adjusting entries for the recording of depreciation
The journal entry to record depreciation is fairly standard. Using our depreciation schedule for Spivey Company, assuming straight-line depreciation for buildings and DDB for machinery and equipment, we would develop the following depreciation schedule:
As of 12/31/20X1 | |||||||
Spivey Company | |||||||
Asset | Description | Date Purchased | Cost | Useful Life | Salvage Value | Depreciation Acc. | Dep |
---|---|---|---|---|---|---|---|
1 | Land | 2/1/20X1 | 262,800 | ||||
4 | Land | 10/1/20X1 | 120,000 | ||||
Total Land | 382,800 | – | – | ||||
2 | Building | 7/1/20X1 | 490,000 | 40 | 49,000 | 5,513 | 5,513 |
5 | Building | 10/1/20X1 | 600,000 | 40 | 60,000 | 4,000 | 4,000 |
Total Buildings | 1,090,000 | 9,513 | 9,513 | ||||
3 | Machine | 7/1/20X1 | 162,000 | 8 | 12,000 | 20,250 | 20,250 |
6 | Delivery Van | 10/1/20X1 | 45,000 | 5 | 5,000 | 4,500 | 4,500 |
7 | Machine | 10/1/20X1 | 99,500 | 8 | 9,500 | 6,219 | 6,219 |
8 | Office Furniture | 10/1/20X1 | 70,000 | 10 | 10,000 | 3,500 | 3,500 |
9 | Computer | 10/1/20X1 | 5,500 | 5 | 500 | 550 | 550 |
Total Machinery and Equipment | 382,000 | 35,019 | 35,019 | ||||
Total PP&E | 1,854,800 | 44,531 | 44,531 |
Assuming no depreciation expense was entered during the year, the year-end adjusting journal entry would be:
Date | Description | Post. Ref. | Debit | Credit |
---|---|---|---|---|
20X1 | ||||
Dec 31 | Depreciation Expense – Buildings | 9,513.00 | ||
Dec 31 | Depreciation Expense – Machinery | 35,019.00 | ||
Dec 31 | Accumulated Depreciation – Buildings | 9,513.00 | ||
Dec 31 | Accumulated Depreciation – Machinery | 35,019.00 | ||
Dec 31 | To record depreciation expense for 20X1 |
After posting the entry, we would see the following balances in the asset accounts:
Depreciation expense is, as the name implies, an income statement account (those entries are not shown above).
The accumulated depreciation accounts are contra-asset accounts. We could just post the credit side of the depreciation expense entry straight to the machinery and building asset accounts, but then we would have to parse those entries back out in order to create the required financial statement disclosures. So instead, we keep the credit entries in separate accounts. Even though the accumulated depreciation accounts are separate, they are permanently attached to the asset accounts they are associated with.
As you have seen, when assets are acquired during an accounting period, the first recording of depreciation is for a partial year.
Full-month convention
Some firms calculate the depreciation for the partial year to the nearest full month the asset was in service. For example, they treat an asset purchased on or before the 15th day of the month as if it were purchased on the 1st day of the month. And they treat an asset purchased after the 15th of the month as if it were acquired on the 1st day of the following month.
In the Spivey example, we assumed that the assets were purchased on the 1st day of the month, but of course, that is not usually the case.
Mid-month convention
Some firms calculate depreciation from the middle of the month of purchase. For example, they treat an asset purchased on any day of the month as if it were purchased on the 15th day of the month. An asset purchase on September 1 would result in 3½ months of depreciation for that first year of service.
Other conventions
Some firms opt to use the actual number of days. For example, an asset purchased on the 10th of June would result in two-thirds of a month’s depreciation for June. Most computer programs support all these conventions and more, such as the half-year convention required for tax purposes in certain circumstances.
Now that you understand the journalizing of depreciation, we’ll next turn to look at the relationship between accumulated depreciation and depreciation expense.
PRACTICE QUESTION