II. Depreciation Expense
When a business buys an asset it in effect buys a “fund of usefulness”. Day by
day as the asset is used in the operations of the business, a portion of this usefulness is
consumed or expired. In accounting, this expiration of an asset’s usefulness is called
depreciation. All fixed assets except land lose their usefulness. Decreases in the
usefulness of assets that are used in generating revenue are recorded as expenses.
Depreciation is an expense and is deducted each year until the cost of the asset is
expensed. The account debited is a depreciation expense account. The account credited
is an accumulated depreciation account. Accumulated depreciation accounts are called
contra accounts because they are deducted from the related asset accounts on the balance
sheet. The use of a contra account allows the original cost to remain unchanged in the
fixed asset account. Depreciation is called a non-cash expense since no actual dollars
exchange hands. There are several methods of calculating depreciation with the most
common being straight line.
Depreciation Expense example:
a. An accountant figured the depreciation for a business as follows: equipment
depreciation of $2500 and improvement depreciation of $1500.
Account Name/Number Account type Increase Decrease Debit Credit
Depreciation expense Expense 4,000 4,000
Accum Depreciation Equip Asset 2,500 2,500
Accum Depreciation Impr. Asset 1,00 1,500
Totals 4.000 4,000
Explanation: Depreciation is an expense that affects the income statement by lowering
the net income. This expense increases by $4,000 the total of the depreciation for the
equipment and the improvements. It can be entered into more than one depreciation
account depending on your preference. The dollar amounts in the accumulated
depreciation account decrease each year as the life of the asset is used up. Depending on
the set-up, there could be a separate depreciation account for each depreciable asset such
as equipment and improvements.
