Depreciation is the systematic allocation of the cost of a fixed asset over its useful life. In ledger accounting, depreciation ensures that the declining value of assets like machinery, vehicles, and equipment is accurately reflected in both the income statement and the balance sheet. This example demonstrates how to record depreciation using detailed journal entries and ledger accounts.
1. Scenario Overview
XYZ Company purchases a delivery van for $24,000 on January 1, with an estimated useful life of 4 years and no residual value. The company decides to use the straight-line method of depreciation. The annual depreciation expense will be calculated as follows:
Annual Depreciation = $24,000 ÷ 4 = $6,000 per year
2. Journal Entries for Depreciation
At the end of each accounting year, XYZ Company records depreciation by debiting the Depreciation Expense account and crediting the Accumulated Depreciation account (a contra asset account that reduces the book value of the van).
A. Journal Entry for Year 1 (December 31)
Debit: Depreciation Expense – Delivery Van $6,000
Credit: Accumulated Depreciation – Delivery Van $6,000
3. Ledger Entries for Depreciation
A. Depreciation Expense Ledger
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Dec 31 (Year 1) | Depreciation of Delivery Van | $6,000 | $6,000 Dr. |
B. Accumulated Depreciation Ledger (Delivery Van)
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Dec 31 (Year 1) | Depreciation for Year 1 | $6,000 | $6,000 Cr. |
C. Continuing Depreciation in Subsequent Years
The same journal entry is made at the end of each subsequent year. After 4 years, the total accumulated depreciation will equal the original cost of the van, reducing its net book value to zero.
Accumulated Depreciation Ledger (Years 2 to 4)
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Dec 31 (Year 1) | Depreciation for Year 1 | $6,000 | $6,000 Cr. | |
| Dec 31 (Year 2) | Depreciation for Year 2 | $6,000 | $12,000 Cr. | |
| Dec 31 (Year 3) | Depreciation for Year 3 | $6,000 | $18,000 Cr. | |
| Dec 31 (Year 4) | Depreciation for Year 4 | $6,000 | $24,000 Cr. |
4. Impact of Depreciation on Financial Statements
- Income Statement: The depreciation expense of $6,000 is recorded annually, reducing the company’s net income.
- Balance Sheet: The delivery van is shown at its original cost of $24,000, with accumulated depreciation deducted to reflect the net book value.
Example: Balance Sheet Impact (End of Year 2)
| Assets | Amount |
|---|---|
| Delivery Van (at Cost) | $24,000 |
| Less: Accumulated Depreciation | ($12,000) |
| Net Book Value | $12,000 |
5. Disposal of the Asset After Full Depreciation
After 4 years, if XYZ Company sells the delivery van for $3,000, the following journal entry is made to account for the disposal:
Journal Entry for Disposal:
Debit: Cash $3,000
Debit: Accumulated Depreciation $24,000
Credit: Delivery Van $24,000
Credit: Gain on Disposal of Asset $3,000
Gain on Disposal of Asset Ledger
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Dec 31 (Year 4) | Sale of Delivery Van | $3,000 | $3,000 Cr. |
6. Recording Depreciation in Ledger Accounting
Properly recording depreciation in ledger accounting ensures that fixed assets are accurately valued and that the company’s expenses reflect the true cost of using these assets over time. By using systematic methods like the straight-line method and maintaining clear ledger entries, businesses can comply with accounting standards, make informed financial decisions, and maintain accurate financial statements.