How do I prepare depreciation journal entries for plant and equipment?
- Expert answer
- Undergraduate
- Asked
The question
My assignment gives equipment costing 50,000, residual value of 5,000 and useful life of five years. I need to calculate depreciation and show the journal entries.
I also need to explain the effect on the income statement and statement of financial position.
Short answer
Depreciation allocates the depreciable amount of an asset over its useful life. The journal entry debits depreciation expense and credits accumulated depreciation, reducing profit and the asset's carrying amount.
Full expert answer
Financial accounting tutor
ACA-qualified accounting support specialist
Depreciation is not a cash payment. It is an accounting allocation of an asset's depreciable amount over the period it helps generate economic benefits. Students often know the formula but lose marks because they do not explain residual value, accumulated depreciation, carrying amount and the financial statement effect.
At undergraduate level, a good answer should show the calculation and the accounting logic. The examiner wants to know whether you understand why depreciation is recorded, not only how to divide cost by useful life.
What the question is asking
The question wants calculation, journal entry and interpretation. You should show:
- which depreciation method is being used
- how depreciable amount is calculated
- the annual depreciation charge
- the journal entry
- the impact on profit and carrying amount
- how the answer changes if useful life or residual value changes
Method for straight-line depreciation
- 1Start with asset cost.
- 2Subtract residual value to find depreciable amount.
- 3Divide by useful life.
- 4Record depreciation expense each year.
- 5Track accumulated depreciation separately from cost.
Mini worked example
Equipment cost is 50,000. Residual value is 5,000. Useful life is five years. The company uses straight-line depreciation.
- Depreciable amount: 50,000 - 5,000 = 45,000
- Annual depreciation: 45,000 / 5 = 9,000
Journal entry each year:
- Dr Depreciation expense 9,000
- Cr Accumulated depreciation 9,000
After one year, the carrying amount is 50,000 - 9,000 = 41,000. The original cost stays in the asset account. The contra-asset account, accumulated depreciation, builds up over time.
After two years, accumulated depreciation is 18,000 and carrying amount is 32,000. This is often where students confuse annual depreciation with accumulated depreciation.
Reducing balance contrast
If the same asset were depreciated at 30 percent reducing balance, year one depreciation would be:
- 50,000 x 30 percent = 15,000
Year two depreciation would be based on the reduced carrying amount:
- Carrying amount after year one: 35,000
- Year two depreciation: 35,000 x 30 percent = 10,500
Reducing balance gives a higher charge in earlier years. It may be more appropriate where the asset is more productive, or loses economic value faster, near the start of its life.
Sample university-style questions and how to answer them
| Sample question | What a strong answer should do |
|---|---|
| Calculate straight-line depreciation for equipment costing 50,000 with 5,000 residual value and five-year useful life. | Calculate depreciable amount, annual depreciation, journal entry and carrying amount after one year. |
| Compare straight-line and reducing balance depreciation for a delivery vehicle. | Explain the timing of expense recognition and why reducing balance may match higher early usage or value loss. |
| Explain how depreciation affects profit, cash flow and carrying amount. | Say depreciation reduces accounting profit and carrying amount but does not itself use cash in the year recorded. |
| A company revises useful life from five years to eight years. How should the answer change? | Treat it as a change in accounting estimate. Recalculate future depreciation prospectively based on remaining carrying amount, not by rewriting prior years. |
| Why is land usually not depreciated? | Explain that land commonly has an indefinite useful life, unlike buildings or machinery. |
Common mistakes
- Treating depreciation as a cash outflow
- Crediting the equipment cost account directly instead of accumulated depreciation
- Forgetting residual value in the calculation
- Depreciating land, which normally has an indefinite useful life
- Confusing annual depreciation with accumulated depreciation
- Forgetting to adjust future depreciation when estimates change
What earns higher marks
Explain why the method should reflect the pattern of economic benefit. Straight-line is suitable when benefits are consumed evenly. Reducing balance may fit assets that are more productive or lose value faster in early years.
Also discuss presentation:
- The income statement shows depreciation expense.
- The statement of financial position shows cost less accumulated depreciation.
- The cash flow statement usually adds depreciation back in the operating section under the indirect method because it is non-cash.
That final link between depreciation and cash flow is a useful way to show wider accounting understanding.
Academic use note
This guide is for accounting assignment support. Use your module's depreciation method, dates and rounding rules when preparing your final answer.
Sources and further reading
This answer explains a method for you to apply to your own work. Copying it into a submission would count as plagiarism, and it is indexed by similarity checkers.
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