A Brand New Car Right Out of The Showroom

Have you ever noticed how a brand-new car can lose $10,000 or more in value the moment you drive it off the lot? It’s a reality that assets, like cars, depreciate over time. Each year of use, that car’s value drops steadily, reflecting its wear and tear. 

This same concept applies to many assets in accounting, where the value of an asset, say machinery, or equipment, decreases over time due to usage, wear, and obsolescence. Understanding how to record this depreciation properly in your financial records is crucial for accurate accounting.

Scenario with Numbers

Let’s break it down with a simple example: Suppose your company has equipment worth $12,000, which depreciates by $1,200 annually.

Recording the Depreciation Journal Entry

To accurately reflect the decrease in the equipment’s value, follow these steps:

• Debit Entry:

  • Depreciation Expense account: Debit $1,200 (This increases your expenses by $1,200).

• Credit Entry:

  • Accumulated Depreciation account: Credit $1,200 (This increases your contra-assets by $1,200).

Journal Entry Example

Date: [End of Accounting Period]
Depreciation Expense (Dr) $1,200
Accumulated Depreciation (Cr) $1,200

This journal entry records the annual depreciation of the equipment. It increases the Depreciation Expense, reflecting the cost of wear and tear, and accumulates this depreciation against the equipment’s value, providing a clearer picture of its current worth.

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