Most business owners might have heard of the term “depreciation”. It refers to an accounting method that allocates the cost of certain tangible assets over their useful life. Even though they have understood what depreciation is, they may still choose to employ an accounting firm in Singapore as they are not sure about the journal entries that they should make to record the depreciation expense. In this article, we will take a look at the correct procedures of recording depreciation in the books of accounts.
The accountants will pass the journal entries for depreciation to record the reduction of the fixed asset value as a result of normal usage, wear and tear and other factors. They will record such transactions by debiting the depreciation account and crediting the relevant fixed asset account in each accounting period. By doing so, the accountant can transfer part of the capitalised cost of the fixed asset the company owns from the fixed asset account in the balance sheet to the company’s depreciation account in its income statement.
The depreciation journal entries include a debit entry to the company’s depreciation expense (Also see What Are Non-cash Expenses? ) account as well as a credit entry to its accumulated depreciation account. The main purpose of passing the journal entries for depreciation is to comply with the matching principle as per the requirements of the applicable accounting framework.
The depreciation expense account shows up in the company’s income statement. It is a temporary account, which means that the accountant will move its balance to the accumulated depreciation account at the end of an accounting period. Thus, when a new accounting (Also see An Overview of Accounting Procedures) period begins, the depreciation expense account will have a zero balance.
On the other hand, one will see the accumulated depreciation account in the asset section under the heading “property, plant and equipment”. This account is a contra asset account as unlike the normal asset accounts that have a debit balance, such accounts have a credit balance. The accumulated depreciation account appears in the balance sheet, and the accountants will carry their outstanding balances to the next period. As the amount of cost of assets which were depreciated increases, the credit balance in the accumulated depreciation account will increase and will be the same as the amount of cost depreciated.
In accounting (Also see Basics of Cost Accounting) , accumulated depreciation is a crucial aspect as this is related to the assets that the company has capitalised. Business owners should understand that when his company recognises a depreciation expense journal entry, the company’s net income (Also see How Do Net Income and Gross Income Differ from Each Other) will reduce by that amount too. The assumptions made in the calculation of depreciation include the estimated useful life of the assets, the assets’ historical cost, as well as the estimated salvage value. Also, depreciation is very helpful in estimating the book value of the assets that the company owns. However, business owners should note that the market value of the assets of the same kind may not be the same as their book values due to various reasons.