How to Record Depreciation in a Journal Entry: A Simple Guide with Examples
If you’ve ever bought a laptop, car, or phone, you know they lose value over time. For businesses, this “loss in value” of equipment, buildings, or vehicles is called depreciation—and it needs to be recorded in your books.
Depreciation isn’t just about tracking old assets: it’s a key part of accurate financial reporting, helping you spread the cost of expensive items over their useful life (instead of deducting the full cost in one year). And at the heart of this process is the depreciation journal entry—the step that officially records this value loss in your accounting system.
In this guide, we’ll break down how to calculate depreciation (using the most common method) and record it with clear journal entry examples—whether you’re depreciating a $500 printer or a $50,000 delivery truck.
What Is Depreciation? (In Plain Language)
Depreciation is the process of allocating the cost of a fixed asset (like machinery, computers, or buildings) over its useful life (how long it will be used in your business).
Why It Matters:
- Matching Principle: You deduct the asset’s cost bit by bit, matching the expense to the years you use the asset to earn revenue (e.g., a $10,000 machine used for 5 years contributes to revenue each year—so you deduct $2,000 annually).
- Accurate Profits: Without depreciation, you’d deduct the full $10,000 in year one, making that year’s profit look artificially low and future years too high.
- Tax Benefits: Most tax systems (like the IRS) let you deduct depreciation expenses, reducing taxable income.
Key Terms You Need to Know
Before recording depreciation, learn these 4 terms—they’ll make the process clear:
| Term | Definition | Example |
|---|---|---|
| Fixed Asset | A long-term asset (used for >1 year) that helps generate revenue. | A delivery truck, office computer, or bakery oven. |
| Useful Life | How long the asset will be used in the business (in years). | A computer might have a 3-year useful life; a building, 30 years. |
| Salvage Value | The asset’s estimated value at the end of its useful life (what you might sell it for). | A $1,200 laptop might have a $200 salvage value after 3 years. |
| Depreciable Cost | The total amount to depreciate over the asset’s life: Cost - Salvage Value. | $1,200 laptop - $200 salvage value = $1,000 depreciable cost. |
The Most Common Method: Straight-Line Depreciation
There are several ways to calculate depreciation, but the straight-line method is the simplest and most widely used—especially for small businesses. It spreads the depreciable cost evenly over the asset’s useful life.
Formula:
Annual Depreciation Expense = (Cost of Asset - Salvage Value) ÷ Useful Life (Years)
Example: Calculating Depreciation for a Printer
Let’s say you buy a printer for your home office:
- Cost of asset: $1,500
- Useful life: 5 years
- Salvage value: $300
Depreciable cost = $1,500 - $300 = $1,200
Annual depreciation expense = $1,200 ÷ 5 = $240
This means you’ll record $240 in depreciation expense each year for 5 years.
How to Record Depreciation in a Journal Entry
Depreciation journal entries follow the rules of double-entry accounting: every entry has a debit and a credit.
The Two Accounts Involved:
- Depreciation Expense (Income Statement account): Tracks the annual cost of using the asset (expense account—debit to increase).
- Accumulated Depreciation (Balance Sheet account): Tracks the total depreciation over the asset’s life (contra-asset account—credit to increase; it reduces the asset’s book value).
Step-by-Step Journal Entry Example
Using the printer example ($240 annual depreciation):
1. Identify the accounts and amounts:
- Debit: Depreciation Expense (increases by $240)
- Credit: Accumulated Depreciation - Printer (increases by $240)
2. Record the journal entry at the end of the year:
| Account Name | Debit Amount | Credit Amount |
|---|---|---|
| Depreciation Expense | $240 | |
| Accumulated Depreciation - Printer | $240 |
What Happens Over Time?
After 3 years of using the printer:
- Total depreciation expense recorded: $240 × 3 = $720
- Total accumulated depreciation: $720
- Book value of the printer (Cost - Accumulated Depreciation): $1,500 - $720 = $780
Depreciation Journal Entry for Different Assets
Let’s apply this to other common business assets to see how the entry changes (and stays the same).
Example 1: Depreciating a Delivery Truck
- Cost: $40,000
- Useful life: 8 years
- Salvage value: $8,000
Annual depreciation = ($40,000 - $8,000) ÷ 8 = $4,000/year
Journal Entry (Year 1):
| Account Name | Debit Amount | Credit Amount |
|---|---|---|
| Depreciation Expense | $4,000 | |
| Accumulated Depreciation - Truck | $4,000 |
Example 2: Depreciating Office Furniture
- Cost: $6,000
- Useful life: 10 years
- Salvage value: $500
Annual depreciation = ($6,000 - $500) ÷ 10 = $550/year
Journal Entry (Year 1):
| Account Name | Debit Amount | Credit Amount |
|---|---|---|
| Depreciation Expense | $550 | |
| Accumulated Depreciation - Office Furniture | $550 |
What Happens When You Sell or Dispose of the Asset?
Eventually, you’ll sell or replace the asset. At that point, you need to remove the asset and its accumulated depreciation from your books.
Example: Selling the Printer After 5 Years
- Original cost: $1,500
- Total accumulated depreciation after 5 years: $1,200 (5 × $240)
- You sell it for $300 (its salvage value).
Step 1: Remove the asset and accumulated depreciation
| Account Name | Debit Amount | Credit Amount |
|---|---|---|
| Accumulated Depreciation - Printer | $1,200 | |
| Cash | $300 | |
| Equipment - Printer | $1,500 |
Example: Selling the Truck Early (After 3 Years)
- Original cost: $40,000
- Accumulated depreciation after 3 years: $12,000 (3 × $4,000)
- You sell it for $25,000 (less than its book value of $28,000).
Step 1: Record the sale and remove the asset
| Account Name | Debit Amount | Credit Amount |
|---|---|---|
| Accumulated Depreciation - Truck | $12,000 | |
| Cash | $25,000 | |
| Loss on Sale of Truck | $3,000 | |
| Equipment - Truck | $40,000 |
Note: The $3,000 loss is because you sold it for less than its book value ($40,000 - $12,000 = $28,000; $28,000 - $25,000 = $3,000 loss).
Common Mistakes to Avoid When Recording Depreciation
- Forgetting to Record Monthly/Quarterly Entries: Most businesses record depreciation monthly or quarterly (not just annually) for accuracy. For the printer: $240/year ÷ 12 = $20/month.
- Monthly entry: Debit Depreciation Expense $20, Credit Accumulated Depreciation $20.
- Depreciating Low-Cost Assets: Small items (e.g., $50 desk lamps) are often expensed immediately (called “expensing” instead of “capitalizing”) because their depreciation isn’t worth tracking.
- Ignoring Salvage Value: Skipping salvage value overstates depreciation expense. Always subtract it from the asset’s cost.
- Using the Wrong Useful Life: A computer won’t last 10 years—use realistic estimates (check IRS guidelines or industry standards for help).
How Depreciation Affects Your Financial Statements
Depreciation impacts two key financial statements:
- Income Statement: Depreciation Expense reduces net income (just like rent or salaries).
- Example: $10,000 revenue - $240 depreciation expense = $9,760 net income.
- Balance Sheet: Accumulated Depreciation reduces the asset’s book value.
- Example: Printer (cost $1,500) - Accumulated Depreciation ($240) = Book Value $1,260.
Final Takeaway: Depreciation Journal Entries Made Simple
Recording depreciation boils down to one idea: spread the cost of an asset over the years you use it. The journal entry is always the same structure:
- Debit Depreciation Expense (to track the annual cost).
- Credit Accumulated Depreciation (to track total value lost).
With the straight-line method, calculating the amount is easy—just use the formula:
Annual Depreciation Expense = (Cost of Asset - Salvage Value) ÷ Useful Life (Years)
Whether you’re using accounting software (which can auto-calculate and record depreciation) or doing it manually, following these steps will ensure your books stay balanced and compliant.