Accounting is not the easiest thing to comprehend. However, there is one subject that is particularly relevant and potentially complicated, which is accumulated depreciation journal entry. The accumulated depreciation journal entry is an accounting entry that represents the total amount of depreciation charge on an asset over the life of that asset. It is reflected on the credit side in the books of accounts. It facilitates demonstrating the actual worth of assets in the balance sheet. It is a journal entry that specifies the amount of depreciation charged on the asset since the date of purchase. The entry is made annually (or monthly, in keeping with the company’s policy) to lower the asset’s value to match the expense with the revenue it enables to earn. It’s not a cash activity but is key to maintaining accurate financials. This article teaches you all that you need to know about accumulated depreciation journal entry accounting.
What is Accumulated Depreciation Journal Entry?
Accumulated depreciation is the sum of all of the depreciation of an asset since it was purchased. It shows how much the worth of the asset has sunk till date. This is a cumulative amount which continues year after year until the asset is sold or fully depreciated.
The associated journal entry is called accumulated depreciation, which is used to account for this loss in value. Each time depreciation is applied, we record this journal entry:
Journal Entry:
| Particulars | Debit | Credit |
| Depreciation A/cTo Accumulated Depreciation A/c | ₹XX | ₹XX |
In this case, depreciation account shows expense (debited) when depreciation is applied, accumulated depreciation account shows total amount of depreciation applied on asset (credited to show this value).
This entry works to decrease the value of the asset without touching the actual asset account. This allows for an excellent overview of how much the asset has depreciated over time.
How to Record Accumulated Depreciation Journal Entry?
If you follow basic steps, recording the accumulated depreciation journal entry accounting is easy. The journal entry to record accumulated depreciation would debit the depreciation expense account and credit the accumulated depreciation account. So it is crucial to understand the way that this entry has been logged. It is a decrease in asset value due to wear and tear over time It elaborates on when and how to record it and how it is presented in books.
Recording Depreciation Accumulated Depreciation Journal Entry
Recording depreciation and accumulated depreciation journal entry can be done by following the steps given below:
- Identify the Asset: Decide on the fixed asset (e.g., machinery, building) to which depreciation is applied.
- Dividend: Choose the depreciation method (Straight Line/Written down value).
- The calculation: Apply depreciation for the year using the formula
Make the Journal Entry:
- Debit the Depreciation account
- Credit the Accumulated Depreciation account
Example of Accumulated Depreciation Journal Entry
We’ll understand this better by an example. Let’s take a simple example:
A company purchases machinery for ₹1,00,000. It uses the straight-line method to charge 10% depreciation every year.
Year 1 Journal Entry:
| Particulars | Debit | Credit |
| Depreciation A/cTo Accumulated Depreciation A/c | ₹10,000 | ₹10,000 |
This continues each year until the value reaches 0 or the asset is sold.
Why Not Cut Asset Down at Source?
In accounting, we do not directly reduce the asset value. Instead, we retain the cost as is, and present accumulated depreciation separately. This new approach offers better visibility and assists in audits and financial statements.
Now, let us understand how to post accumulated depreciation journal entry in Tally.
Accumulated Depreciation Journal Entry in Tally
Tally is a popular accounting software in India. It is a common tool for students and professionals for record-keeping. Accumulated Depreciation journal entry in Tally is entered through the journal voucher. This is done by debiting depreciation expense and crediting contra-asset account accumulated depreciation. It shows the depreciation expense for the period and increases the accumulated depreciation balance.
How to Make Depreciation Entry Tally?
In Tally, to pass accumulated depreciation journal entry in Tally, you need to follow the following steps:
- Create Ledger:
- Gateway of Tally → Accounts Info → Ledgers → Create
- Generate a report fields for “Depreciation” under Indirect Expenses
- Under Fixed Assets Create “Accumulated Depreciation”
- Pass the Journal Entry:
- Navigate to Accounting Vouchers → F7 (Journal)
- Debit: Depreciation A/c
- Credit: Accumulated depreciation A/c
- Narration:
- So always mention a small narration for eg: “Being depreciation charged on machinery @10% for FY 2024-25.
Example in Tally
Assuming depreciation on Furniture is ₹5,000:
- Debit: Depreciation ₹5,000
- Credit: Accumulated Depreciation ₹ 5,000
This ensures accurate asset value in the Balance Sheet in Tally.
In this article, we will see how to pass depreciation accumulated in a journal entry in Tally.
Now, let’s look at journal entries once the asset is sold.
Journal Entry for Sale of Equipment with Accumulated Depreciation
When a company sells an asset, it has to remove both the asset and its accumulated depreciation from its books. It is therefore important to understand the entry made in such a case. So now, let us know the journal entry at the time of sale of equipment with accumulated depreciation.
Process When It Comes to Asset Selling
If you have sold the item, use the following steps to record sale:
- Remove original asset cost
- Eliminate accumulated depreciation
- Record sale value
- Record gain or loss (if any)
Journal Entry Format
Example:
- Equipment cost: ₹50,000
- Accumulated depreciation: ₹30,000
- Sold for ₹25,000
Journal Entries:
Remove Asset and Depreciation:
| Particulars | Debit | Credit |
| Accumulated Depreciation A/cLoss on Sale of Equipment A/cBank A/cTo Equipment A/c | ₹30,000₹5,000₹25,000 | ₹50,000 |
In practical life, this kind of entry is quite usual in any industry and companies which regularly sells machines and assets.
Next, we are going to learn about some real-world examples of accumulated depreciation journal entry.
Example of Accumulated Depreciation Journal Entry in Real Life
In the real world, journal entries for accumulated depreciation are always debit depreciation expense credit accumulated depreciation. It is an accounting entry that is made at the end of every accounting period, highlighting the continued decline in value (loss) of fixed assets. This section provides simple yet detailed examples from everyday business. These assist you in learning better and getting ready for your exams or jobs.
Example 1 – Computer Purchase
Question First, we know that a question paper does not contain only one, two or three types of questions. The annual depreciation rate is 20%. After 2 years, depreciation accumulated would be ₹24,000.
Year 1 Entry:
- Debit: Depreciation ₹12,000
- Accumulated Depreciation ₹₹12,000 Credit
Year 2 Entry:
- Debit: Depreciation ₹12,000
- Accumulated Depreciation ₹12,000
The accumulated depreciation total is ₹24,000. Net book value = ₹36,000.
Example 2 – Vehicle Sold
Cost of vehicle ₹2,00,000, depreciation ₹1,20,000. Sold for ₹70,000.
- Remove vehicle: Credit Vehicle A/c ₹2,00,000
- Remove depreciation: Debit Accumulated Depreciation ₹1,20,000
- Record sale: Debit Bank ₹70,000
- Loss: Debit Loss A/c ₹10,000
This illustrates how journal entry for sale of equipment with accumulated depreciation takes place in real life.
Relevance to ACCA Syllabus
A basic understanding of fixed assets and depreciation is fundamental to ACCA’s Financial Accounting (FA) and Financial Reporting (FR) papers. Under IFRS standards, students must know how to record and present depreciation and accumulated depreciation in financial statements.
Accumulated Depreciation Journal Entry ACCA Questions
Q1: Journal entry for depreciation on fixed assets?
A. Deferred Revenue A/c Dr.
B. Depreciation A/c Dr. To Asset A/c
C. Depreciation A/c Dr. To Accumulated Depreciation A/c
D. Accumulated Depreciation A/c Dr. Asset A/c
Answer: C
Q2: Accumulated depreciation shown in the balance sheet looks like this:
A. Liability
B. Part of Current Assets
C. Write-off against non-current assets
D. Operating Expense
Answer: C
Q3: Accumulated depreciation is seen as a:
A. Direct Expense
B. Contra Asset
C. Liability
D. Non-current Asset
Answer: B
Q4: What is the primary use of accumulated depreciation?
A. To calculate tax
B. To write off liabilities
C. To make the expense align with revenue
D. To increase revenue
Answer: C
Q5: What happens when accumulated depreciation on an asset has a management’s discretion when it comes to the disposal of an asset.
A. It goes to Capital Reserve
B. It is given a debit X to get it off books
C. It is added to asset value
D. It is shown as profit
Answer: B
Relevance to US CMA Syllabus
CMA’s Part 1: Financial Planning, Performance, and Analytics, covers asset management and expense allocation. There are two main points, here, for candidates; 1) Knowing depreciation and accumulated depreciation journal entries make candidates plan up financial strategy, kept control over cost and make investment decisions.
Accumulated Depreciation Journal Entry US CMA Questions
Q1: Which entry correctly shows accumulated depreciation?
A. Asset A/c Cr. To Depreciation A/c
B. Depreciation A/c Dr. To Accumulated Depreciation A/c
C. Dr Accumulated Depreciation A/c To Cash A/c
D. To Asset A/cD. Depreciation A/c Dr.
Answer: B
Q2: Accumulated Depreciation Helps Management To:
A. Track new assets
B. Determine asset life and costs
C. Compute fair market value
D. Record future cash flows
Answer: B
Q3: Accumulated depreciation on the balance sheet is:
A. Shown as a liability
B. Added to capital
C. To be deducted from related asset
D. Considered a reserve
Answer: C
Q4: Why does CMA have to know about the accumulated depreciation?
A. For internal audit
B. To inflate earnings
C. For purpose of dividing costs and budget
D. For dividend declaration
Answer: C
Q5: Which of the following statements is NOT true regarding accumulated depreciation?
A. It decreases the book value of assets
B. It is found on the income statement
C. It accumulates over time
D. It can influence budgeting decisions
Answer: B
Relevance to US CPA Syllabus
Regularly scheduled testing on accounting principles and standards related to depreciation and its effect on the value of assets and accumulated assets during the disposal of assets, transfers, or asset impairments is added to the FAR (Financial Accounting and Reporting) section for CPAs.
Accumulated Depreciation Journal Entry US CPA Questions
Q1: Accumulated depreciation is what kind of account?
A. Liability
B. Contra-asset
C. Expense
D. Revenue
Answer: B
Q2: For example, when a company sells any of its assets, what happens to its accumulated depreciation?
A. It is carried forward
B. It is credited again
C. It is removed from books
D. It added to gain on sale
Answer: C
Q3: The depreciation expense is present on the:
A. Balance Sheet
B. Statement of Cash Flows
Statement C: Statement of Retained Earnings
D. Income Statement
Answer: D
Q4: And if depreciation is under-reported, what is the consequence of income?
A. Income is overstated
B. Income is understated
C. No impact
D. Asset value increases
Answer: A
Q5: What financial statement includes a balance for accumulated depreciation?
A. Trial Balance
B. Income Statement
C. Balance Sheet
D. Cash Flow Statement
Answer: C
Relevance to CFA Syllabus
CFA Level 1 – Financial Reporting and Analysis, candidates study how depreciation impacts financial performance and asset valuation. The analysis of accumulated depreciation improves financial ratios and investment decisions.
Accumulated Depreciation Journal Entry CFA Questions
Q1: Accumulated depreciation offset the:
A. Gross asset value
B. Fair market value
C. Book value of asset
D. Cash flow
Answer: C
Q2: Accumulated depreciation is:
A. A current liability
B. Reported under expenses
C. Deducted from fixed asset as part of balance sheet
D. Added to equity
Answer: C
Q3: What does high accumulated depreciation mean for analysis?
A. Indicates newer assets
B. Indicates potential need for asset replacement
C. Implies cash surplus
D. Shows no analytical value
Answer: B
Q4: A firm depreciates a machine every year. What happens to the net book value?
A. It stays constant
B. It increases
C. It decreases
D. It depends on cash flow
Answer: C
Q5: Which depreciation method would you use to apply equal depreciation every single year?
A. Reducing balance
B. Double declining
C. Straight-line
D. Units of production
Answer: C
