DEPRECIATION ACCOUNTING: Methods, Journal Entries, and Financial Reporting

Graziano Stefanelli
Jun 9
2 min read

Depreciation spreads the cost of a tangible asset over its useful life to match expense with economic benefit.

It affects both the income statement (via expense) and the balance sheet (via accumulated depreciation).

1. What Is Depreciation?

Depreciation is the systematic allocation of an asset’s cost over the periods it is used.

It applies to tangible fixed assets such as:

Machinery
Vehicles
Office equipment
Buildings

Land is not depreciated, as it does not lose value from use.

2. Depreciable Cost and Useful Life

Depreciable base = Cost of asset – Residual (salvage) value

The depreciable base is allocated over the asset’s useful life, which must be estimated based on expected usage, wear and tear, and legal/technical limits.

3. Depreciation Methods

Method	Formula / Key Feature
Straight-Line	Equal amount each year: (Cost – Salvage) ÷ Useful Life
Declining Balance	Accelerated method using a fixed % of book value
Double Declining	2 × Straight-Line rate applied to book value
Units of Production	Based on actual usage or output: Cost per unit × Units used

Example (Straight-Line):

Asset cost = €30,000

Salvage = €3,000

Useful life = 5 years→ Annual depreciation = (€30,000 – €3,000) ÷ 5 = €5,400

4. Journal Entry for Depreciation

Each accounting period:

debit Depreciation Expense
credit Accumulated Depreciation

Example entry:

debit Depreciation Expense ............................ 5,400
credit Accumulated Depreciation .................... 5,400

Accumulated depreciation is a contra-asset account that offsets the asset’s cost on the balance sheet.

5. Mid-Year and Partial-Year Depreciation

If an asset is acquired mid-year, depreciation may be prorated.

Example:

Asset acquired July 1, straight-line method

Annual depreciation: €4,800→ Half-year depreciation in Year 1 = €2,400

Companies may use:

Full-month convention (depreciate for entire month of acquisition)
Half-year convention (assume 6 months regardless of purchase date)

Policies should be applied consistently.

6. Depreciation Schedule Example

Year	Depreciation Expense	Accumulated Depreciation	Net Book Value
1	€5,400	€5,400	€24,600
2	€5,400	€10,800	€19,200
3	€5,400	€16,200	€13,800
4	€5,400	€21,600	€8,400
5	€5,400	€27,000	€3,000 (salvage)

7. Asset Disposal and Depreciation Stop

Depreciation stops when:

Asset is fully depreciated
Asset is disposed of or sold

Disposal entry includes:

Removing asset cost and accumulated depreciation
Recording cash received
Recognizing gain or loss

8. Depreciation vs Impairment

Aspect	Depreciation	Impairment
Timing	Planned, recurring	Unexpected, one-time
Basis	Useful life and residual value	Recoverable amount < carrying value
Reversal (IFRS only)	Not permitted under US GAAP	Permitted under IFRS if conditions improve

9. Financial Reporting and Disclosures

Balance Sheet:
- Fixed assets shown at cost minus accumulated depreciation
Income Statement:
- Annual depreciation expense reported under operating expenses
Cash Flow Statement:
- Added back to net income under operating activities (non-cash expense)

Disclosures include:

Depreciation method(s) used
Useful lives or depreciation rates
Total depreciation for the period
Gross and net book value of assets

Key take-aways

Depreciation allocates asset costs over useful life, aligning expense with usage.
Methods like straight-line, declining balance, and units of production affect timing of expense recognition.
Accumulated depreciation tracks total expense to date and reduces the book value.
Consistent policy and accurate estimates ensure reliable financial reporting.

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