Journalize Depreciation

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:

Fixed Assets
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:

JournalPage 101
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:

There are five T accounts show. Three in a top row and two in a bottom row. In the top row, on the left is a machinery chart. There is a dash representing the beginning balance on the debit side. There is a debit entry on July 1st of 162,000 dollars. There is a debit entry on October 1st of 220,000 dollars. There is a debit total of 382,000 dollars. In the top row, in the middle is a building chart. There is a dash representing the beginning balance on the debit side. There is a debit entry on July 1st of 490,000 dollars. There is a debit entry on October 1st of 600,000 dollars. There is a debit total of 1,090,000 dollars. In the top row, on the right is a land chart. There is a dash representing the beginning balance on the debit side. There is a debit entry on February 1st of 262,800 dollars. There is a debit entry on October 1st of 120,000 dollars. There is a debit total of 382,800 dollars. On the second row, on the left is an Acc. Dep-Machinery chart. On the credit side, there's a dash representing the beginning balance. On the credit side, there is an adjusting journal entry, on December 31st, of 35,019 dollars. There is an ending balance of 35,019 dollars on the credit side. In the top row, on the right side is an Acc. Dep-Building chart. On the credit side, there's a dash representing the beginning balance. On the credit side, there is an adjusting journal entry, on December 31st, of 9,513 dollars. There is an ending balance of 9,513 dollars on the credit side.

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.

A calendar.

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