- Debit to the income statement account Depreciation Expense
- Credit to the balance sheet account Accumulated Depreciation
The income statement account Depreciation Expense is a temporary account. Therefore, at the end of each year, its balance is closed and the account Depreciation Expense will begin the next year with a zero balance.
The account Accumulated Depreciation is a balance sheet account and therefore its balance is not closed at the end of the year. Accumulated Depreciation is a contra asset account whose credit balance will get larger every year. However, its credit balance cannot exceed the cost of the asset being depreciated.
Purpose of Journal Entry for Depreciation
The purpose of the journal entry for depreciation is to achieve the matching principle. In each accounting period, part of the cost of certain assets (equipment, building, vehicle, etc.) will be moved from the balance sheet to depreciation expense on the income statement. The goal is to match the cost of the asset to the revenues in the accounting periods in which the asset is being used.
More Information on the Depreciation Entry
It is important to understand the following:
- The depreciation entry will cause a decrease in the company's net income, but the company's cash is not decreasing. (Cash was decreased when the asset was acquired.)
- The depreciation entry is an estimate based on the asset's historical cost, its estimated useful life, and its estimated salvage value.
- The depreciation entry is an allocation of the asset's cost, it is not an attempt to indicate the current market value of the asset.