Journal Entry for Depreciation: 7 Common Mistakes and How to Avoid Them

Depreciation is a key concept in accounting, helping you understand how assets lose value over time. 

Whether you’re managing machinery, office equipment, or other assets, it’s important to know how to record this loss correctly.

In accounting, making the right journal entries for depreciation is crucial. 

It helps keep your financial statements accurate and ensures that the true value of your assets is always reflected.

In this blog, we’ll cover everything you need to know about depreciation:

• What is depreciation and why does it matter?
• How to record journal entries for depreciation?
• Common mistakes to avoid when recording depreciation
• Examples of journal entries for different types of assets

Understanding how to record depreciation is essential for keeping your books in order. Let’s start by exploring what depreciation actually means.

What is Depreciation?

Let’s start with a simple explanation. 

Depreciation is when something you own, like machinery or equipment, loses value over time. 

This happens because you use the asset regularly or sometimes because of normal wear and tear. 

Think of it as a car. The more you drive it, the less it’s worth, right? That’s depreciation.

Now, why is this important for companies? When a company buys an asset, it doesn’t just count the cost simultaneously. 

Instead, it spreads that cost over several years, depending on how long it plans to use it. 

This way, the company doesn’t feel the complete financial hit immediately. It only records a part of the asset’s cost yearly, which we call depreciation expense.

For example, let’s say a company buys machinery worth ₹20,000. 

If they plan to use it for ten years, they might record ₹2,000 as depreciation each year. This shows that the machine is gradually losing value over time in their accounting books. 

This is called a journal entry for depreciation expense.

Here’s a simple example:

Imagine depreciation charged on machinery is ₹5,000. In the accounting records, they will make a journal entry like this:

• Debit: Depreciation Expense ₹5,000
• Credit: Accumulated Depreciation ₹5,000

By doing this, the company tracks how much value the machinery loses every year while also spreading the cost over its useful life.

Depreciation Methods and Their Impact on Journal Entries

Now that you know what depreciation is, let’s talk about how companies calculate it.

There are different ways, or methods, to figure out how much depreciation to record each year. Let me explain the most common ones to you.

1. Straight-Line Depreciation

The straight-line depreciation method is the easiest and most popular. Here, the company spreads the depreciation equally over the asset’s entire life. 

So, the same amount is recorded each year until the asset’s value reaches zero or its salvage value.

Let’s say, for example, a company buys machinery for ₹20,000. They expect it to last for 10 years. With straight-line depreciation, they will record ₹2,000 as depreciation every year (₹20,000 ÷ 10 years). Simple, right?

So, in this case, the journal entry for straight-line depreciation would look like this:

• Debit: Depreciation Expense ₹2,000
• Credit: Accumulated Depreciation ₹2,000

This way, the company shows the same amount of depreciation on the books every year.

2. Double-Declining Balance Method

Now, the double-declining balance method is a little different. In this method, more depreciation is recorded in the early years of the asset's life and less in the later years. It’s like saying the asset loses value faster when it’s new and less as it gets older.

For example, let’s say a company uses this method for machinery worth ₹20,000. They might charge ₹4,000 in depreciation during the first year, and then a smaller amount the next year.

So, the journal entry for double-declining depreciation for the first year could look like this:

• Debit: Depreciation Expense ₹4,000
• Credit: Accumulated Depreciation ₹4,000

With this method, the company records more depreciation in the beginning and gradually reduces it.

3. Units of Production Depreciation

Finally, there’s the units of production depreciation method. This one is based on how much the asset is used. It’s very useful for machines or equipment where usage can vary a lot year to year.

For example, if a machine produces 10,000 units in its first year and 5,000 in the second year, the company will record more depreciation in the first year since the machine worked harder.

Here’s how it might work:

• If the machine costs ₹20,000 and is expected to produce 100,000 units over its life, the company would record ₹2 in depreciation for each unit produced (₹20,000 ÷ 100,000 units).

In this method, depreciation depends on the asset's usage, making it different from the other methods.

By understanding these methods, you can see how companies decide how much to record as depreciation and how it affects their financial statements. 

Each method has its own impact on the journal entry for depreciation, depending on the asset and its use.

How To Record Depreciation in the Journal?

Alright, now let’s get into how you actually record depreciation in your accounting books. Don’t worry, it’s simpler than it sounds!

You’ll follow a standard format every time you record depreciation. 

This format shows how much value your asset has lost over time.

Here’s how it works:

First, you’ll debit an account called Depreciation Expense. This is because depreciation is a cost for the business, and you want to show this as an expense in your financial records. 

It tells everyone that part of the asset’s value is gone.

Then, you’ll credit an account called Accumulated Depreciation. This account works a bit differently—it's what we call a “contra asset account.” What this means is that it lowers the overall value of your asset on the balance sheet.

Let’s look at an example to make it clearer:

Imagine you have some equipment, and the depreciation for this year is ₹5,000. You will make a journal entry like this:

• Debit: Depreciation Expense ₹5,000
• Credit: Accumulated Depreciation ₹5,000

What this means is you’re adding ₹5,000 as an expense (Depreciation Expense), and at the same time, you’re reducing the value of the equipment by adding ₹5,000 to Accumulated Depreciation. 

So the equipment’s value on your balance sheet goes down.

Now, why do you need to do this? Well, if you just keep the original value of the equipment in your records without subtracting depreciation, it won’t show the true value of your assets. 

Over time, equipment wears out, and this is your way of accounting for that loss of value.

When you record this, it’s called a journal entry for equipment depreciation. The part where you reduce the equipment's value is recorded in the journal entry for accumulated depreciation.

In short, every time your assets lose value, you show it by making this journal entry. It helps keep your financial records accurate and reflects the real worth of your assets. Easy, right?

Adjusting Journal Entries for Depreciation

Let’s talk about something important: adjusting journal entries for depreciation. You might be wondering, why do we need to adjust entries? Well, let me explain.

At the end of every accounting period—this could be every month, quarter, or year—you need to make sure your financial records are up to date. 

Depreciation is one of those things that need adjusting because it happens continuously as your assets are used.

Now, what exactly is an adjusting journal entry for depreciation? 

It’s a way to record the depreciation that has happened over a specific time period, like a year, so your books are accurate. 

Without these adjustments, you might be showing assets at their original value, which isn’t true because they lose value over time.

How do you make an adjusting entry for depreciation?

It’s pretty simple! You’ll follow the same process as recording any depreciation. For example, let’s say you have equipment, and the annual depreciation for it is ₹5,000.

Here’s what the journal entry would look like:

• Debit: Depreciation Expense ₹5,000
• Credit: Accumulated Depreciation ₹5,000

By making this entry, you’re adjusting your records to show that ₹5,000 of value has been lost from the equipment over the year.

Now, when should you do this? Typically, adjusting entries are made at the end of the accounting period, whether it’s the year-end or every month, depending on your business’s needs.

By making these adjustments, you ensure that your financial statements reflect the actual condition of your assets. In other words, you’re not overvaluing them by showing them at their original cost.

Journal Entries for Different Asset Types

Now, let’s dive into how to record depreciation for different types of assets. 

You might have various assets in your business, like machinery or office equipment, and each of these loses value over time. 

But don’t worry, the process of recording depreciation is similar for all of them. 

Let me walk you through some examples.

Machinery Depreciation

Let’s start with machinery. When you buy machinery for your business, it’s important to record how its value decreases every year. Just like before, you will make a journal entry to show this loss in value.

For example, say your company has machinery, and the depreciation for the year is ₹10,000. The journal entry for depreciation on machinery would look like this:

• Debit: Depreciation Expense ₹10,000
• Credit: Accumulated Depreciation ₹10,000

By doing this, you’re showing that the machinery is now worth ₹10,000 less. This keeps your financial records accurate, showing the real value of the machinery.

Office Equipment Depreciation

Now let’s talk about office equipment. Maybe you have things like computers, desks, or printers. These also lose value over time, and you need to record that depreciation.

For example, let’s say the annual depreciation for your office equipment is ₹2,000. The journal entry for equipment depreciation would be:

• Debit: Depreciation Expense ₹2,000
• Credit: Accumulated Depreciation ₹2,000

This entry shows that ₹2,000 of value has been lost from your office equipment.

It’s the same basic idea as with machinery, but now we’re applying it to things you use in your office. When you ask, “What’s the journal entry for office equipment depreciation?”, you’ll always be debiting depreciation expense and crediting accumulated depreciation. This helps track the equipment’s decreasing value over time.

Why These Entries Matter

You might be wondering, why do these journal entries matter so much? Well, if you don’t record depreciation, your financial records will show that your assets are worth more than they actually are. 

And we don’t want that! These entries make sure you’re always showing the true value of what your business owns.

So, the next time you record depreciation, follow these simple steps for any asset type, and your accounting books will be correct!

‍

Recording Accumulated Depreciation

Let’s take a closer look at depreciation accumulated. If you’ve been following along, you know that depreciation is when an asset loses value over time. But what is accrued depreciation, and why is it important? 

Don’t worry—I’ll explain it step by step.

What is Accumulated Depreciation?

Accumulated depreciation is simply the total amount of depreciation that has been recorded over the life of an asset. Think of it as a running total. Every year (or every accounting period), you record a little bit of depreciation for your asset. Over time, this adds up to become accrued depreciation.

Now, why does this matter? Accrued depreciation helps lower the book value of your assets on the balance sheet. The book value is the value of the asset after all the depreciation has been accounted for. So, instead of showing the asset at the price you bought it for, you show its actual, current value.

Example: Accumulated Depreciation on a Machine

Let’s say your company buys a machine for ₹20,000, and every year, you record ₹2,000 in depreciation. After the first year, the accrued depreciation would be ₹2,000. After two years, it would be ₹4,000, and so on.

Now, if you wanted to see the book value of the machine after two years, you would subtract the accrued depreciation from the original cost:

• Original cost: ₹20,000
• Accrued depreciation after 2 years: ₹4,000
• Book value: ₹20,000 – ₹4,000 = ₹16,000

So, in this case, the machine is now worth ₹16,000 on paper.

How Do You Record Accumulated Depreciation?

Recording accrueddepreciation is just like recording regular depreciation. Every time you make a depreciation entry, you add to the accrued depreciation account. This account offsets the value of your asset. In simple terms, it shows how much value the asset has lost over time.

For example, let’s say you’re recording ₹2,000 of depreciation for the year. The journal entry for accrued depreciation on the machine would look like this:

• Debit: Depreciation Expense ₹2,000
• Credit: Accrued Depreciation ₹2,000

Each time you credit the accumulated depreciation account, you’re lowering the value of the asset on your books.

Why Does This Matter?

If you don’t record accumulated depreciation, your assets will still show their full, original value on your financial statements, even though they’ve lost some of that value. 

This would give a false picture of how much your assets are really worth.

So, whether you’re talking about machinery, office equipment, or any other asset, the journal entry for accumulated depreciation on equipment or any asset works the same way. 

You’ll debit depreciation expense and credit accrued depreciation to reflect the real, reduced value of the asset.

In short, recording accumulated depreciation keeps your books accurate and ensures that your financial statements reflect the true value of your assets over time.

Depreciation on Sale or Disposal of Assets

Let’s talk about what happens when you sell or get rid of an asset. It’s a bit different from just recording regular depreciation, but don’t worry—I’ll walk you through it step by step.

When a business sells or disposes of an asset, like a machine or equipment, the asset isn’t worth the same as when it was first bought, right? 

This is because of depreciation. So, when you sell or dispose of it, you need to account for the depreciation that has already happened.

How to Record Depreciation When You Sell an Asset?

Here’s the process: When you sell an asset, you need to take into account its accumulated depreciation. This is the total amount of depreciation that has built up over the years. You will debit the accumulated depreciation account to show that you are removing that depreciation, and then you will credit the asset account because you’re no longer owning the asset.

Let me give you an example to make this clearer.

Example: Selling a Machine

Imagine you have a machine that you bought for ₹20,000. Over time, you’ve recorded ₹8,000 in depreciation. Now, you decide to sell the machine for ₹12,000.

Here’s how you would record this sale in your journal:

• Debit: Accumulated Depreciation ₹8,000
• Debit: Cash ₹12,000 (the amount you received from selling the machine)
• Credit: Equipment (the machine) ₹20,000

In this case, the journal entry for the sale of the asset with accumulated depreciation shows that you’ve sold the machine, removed the depreciation, and received the cash. 

By debiting accumulated depreciation, you are showing that the value of the machine has decreased over time by ₹8,000, and now that you’ve sold it, the machine is no longer part of your assets.

Here are the Common Mistakes people make in Recording Depreciation

Let’s talk about some common mistakes people make when recording depreciation. 

It’s easy to slip up, but if you know what to watch out for, you can avoid these errors and keep your financial records accurate.

1. Recording Depreciation in the Wrong Period

One common mistake is recording depreciation in the wrong accounting period. For example, you might forget to record it at the end of the month or year, or worse, record it too early or late. 

This can mess up your financial statements because depreciation needs to be recorded in the right time period.

How to avoid this:

Always make sure you’re updating your depreciation entries at the end of each accounting period, whether that’s monthly, quarterly, or annually. 

Keep a schedule or set a reminder, so you don’t miss it.

2. Misclassifying Accounts

Another mistake is misclassifying accounts. Sometimes, people mistakenly debit the wrong expense account or credit the wrong accumulated depreciation account. 

This can cause confusion in your financial statements and make it hard to track the true value of your assets.

How to avoid this:

Always double-check your accounts before making a journal entry. The correct journal entry for depreciation usually involves debiting the Depreciation Expense account and crediting the Accumulated Depreciation account.

 This ensures everything is categorised properly.

3. Forgetting to Adjust for Accumulated Depreciation

Some people forget to adjust the accumulated depreciation when they sell or dispose of an asset. 

This mistake leads to overstating the value of assets on the balance sheet, making it look like your company still owns assets it doesn’t.

How to avoid this:

Whenever you sell or dispose of an asset, make sure to include the accumulated depreciation in your journal entry. 

For example, if you’re selling machinery, don’t forget to debit the Accumulated Depreciation account along with crediting the asset account. 

This way, your financial records stay accurate.

4. Using the Wrong Depreciation Method

Using the wrong depreciation method for an asset is another common mistake. 

Different assets may require different methods, like straight-line depreciation or double-declining balance. 

If you use the wrong method, your depreciation amounts could be inaccurate, which could lead to issues later on.

How to avoid this:

Understand which depreciation method applies to each of your assets.

 For example, if you are using the straight-line method, the depreciation amount should be the same every year. If you’re not sure, check with your accountant or review your company’s depreciation policy.

5. Not Reviewing Entries Regularly

Lastly, some people don’t review their depreciation entries regularly. This can cause small errors to add up over time, making it harder to fix later. 

You might miss mistakes or inconsistencies if you’re not checking your records often.

How to avoid this:

Make it a habit to review your depreciation entries regularly. 

Look over your books at the end of each accounting period to ensure that all the entries are accurate and that depreciation is being recorded correctly.

Final Tip on How to Record Journal Entry for Depreciation

To avoid these mistakes, always follow the basic rule for depreciation:

• Debit: Depreciation Expense
• Credit: Accumulated Depreciation

By following this, you’ll know exactly how to record a journal entry for depreciation and keep your financial records clear and correct.

In short, avoiding these common mistakes will help you maintain accurate financial statements, showing the true value of your assets. Keep these tips in mind, and you’ll be recording depreciation like a pro in no time!

Conclusion: Keep Your Depreciation Records Simple and Accurate!

Congratulations! You've made it through everything you need to know about journal entries for depreciation. 

Whether it’s understanding different methods, making adjusting entries, or avoiding common mistakes, you're now ready to handle depreciation with confidence.

Remember, always record depreciation regularly and accurately. This way, your books will show the real value of your assets, and your financial statements will stay reliable.

If you’re feeling unsure, just keep it simple: debit Depreciation Expense, credit Accrued Depreciation. Easy, right? With this in mind, you’ll have no trouble keeping your records in top shape.

Want to make managing depreciation and other accounting tasks even easier? 

Try Xenett, a powerful tool that helps you keep your financial records accurate and saves you time on manual entries. 

Get started with Xenett today and simplify your accounting workflow!

Happy accounting, and keep up the great work! Bye 😀