Do you know how do accountants account for the depreciation of assets? Business owners often ask an accounting firm in Johor Bahru for help as the calculation of depreciation can be quite complicated sometimes, especially if they own various classes of assets in their business. To deal with depreciation, the accountants will need journal entries for accumulated depreciation. They will pass these entries by year-end to adjust the book value of capital assets that the company owns.
You may have a lot of questions in your mind right now: What is accumulated depreciation? Where did that come from? How should I record them? No worries, we are going to reveal the answers in the article below and let us tell the story from the start.
Most business owners (Also see Accounting Tips That All Business Owners Should Know) know that the company needs to charge depreciation expenses to depreciate the company’s fixed assets at the year-end. However, instead of crediting the cost of the assets directly, the accountants will increase the balance recorded in the accumulated depreciation account. This is because the accounting standards require the companies to disclose the cost of those fixed assets and the accumulated depreciation relevant to those assets in their financial statements.
Thus, the accountants need to pass the journal entries for accumulated depreciation in the books of accounts of a company. To pass these entries, what would the accountants do? They will add the depreciation expense incurred that year to the accumulated depreciation account. This means that they will debit the depreciation expense account. At the same time, they will credit the accumulated depreciation account in the company’s books of accounts.
If the company decided to dispose or sell an asset, the accountants need to write off the cost of that asset as well as the balance recorded in the accumulated depreciation account. To record this transaction, they should debit the accumulated depreciation account and credit the company’s asset account.
Even though passing journal entries for accumulated depreciation can be time-consuming for companies that own a lot of assets, such entries bring some advantages too. As these entries record all the transactions relating to the fixed asset depreciation, the company can trace them easily. Also, these entries credit the company’s accumulated depreciation account by the amount of yearly depreciation annually. These balances will show up in the company’s financial statements. Hence, business owners get to know the sum of depreciation expenses that has been charged from the day they purchased (Also see Journal Entries for Credit Purchases) those assets.