Depreciation journal entries: Definition, calculation, and examples [2025]

Whether it’s vehicles, laptops, office furniture, or machinery, every business has fixed assets to manage.

But despite how commonplace fixed assets are, accounting for them can be a challenge. A clear understanding of fixed asset depreciation and the corresponding journal entries can help make the process easier.  

This post will delve into the specifics of depreciation expense journal entries, where and how to record them, and how they impact financial statements. 

What is a depreciation expense?

Asset depreciation is the process of allocating the cost of a fixed asset over its useful life. This accounts for the fact that assets depreciate due to wear and tear, obsolescence, and other factors.

A depreciation expense is the total amount deducted each period from the asset’s value. This helps match the expense of using an asset with the revenue it helps generate.

What is a depreciation journal entry?

A depreciation journal entry records the reduction in value of a fixed asset each period throughout its useful life. These journal entries debit the depreciation expense account and credit the accumulated depreciation account, reducing the book value of the asset over time.

Accounting for depreciation provides an accurate picture of a company's financial status by aligning the cost of an asset with the periods in which it generates revenue.

What is accumulated depreciation?

Accumulated depreciation records the cumulative depreciation expense of a fixed asset over its useful life, reflecting the reduction in its value due to wear and tear, obsolescence, or usage. 

As a contra-asset account, it offsets the cost of an asset on the balance sheet, showing its reduced book value rather than its original purchase price. This allows businesses to track the net value of their assets over time and make informed financial decisions regarding asset replacement, maintenance, or disposal.

Benefits of depreciation expense journal entries

Depreciation journal entries allow you to keep an accurate record of your fixed assets. They help provide:

• Accurate financial reporting: Recording depreciation creates a fair representation of each asset’s worth, making financial statements accurate and reliable.
• Expense matching principle: Depreciation follows the matching principle in accounting, which aligns the cost of an asset to the period in which it generates revenue.
• Tax deductions: Depreciation can impact a company's tax liability because it’s a non-cash expense that reduces taxable income.
• Asset replacement planning: Recording depreciation helps businesses plan for asset replacements, so you won’t be surprised by unexpected asset costs.
• Accounting standards compliance: Depreciation journal entries ensure your financial records meet accounting standards like Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). These standards require businesses to record depreciation in a consistent and transparent way, making sure your accounting practices remain clear and compliant.

How to calculate and record depreciation journal entries

Before you create your depreciation journal entry, you need to follow a few steps to calculate the expense:  

1. Gather data

To calculate depreciation expenses for your assets, you need the following information:

• Asset cost: The original purchase price of the asset
• Useful life: The estimated time the asset will be useful to the business
• Salvage value: The estimated value of the asset at the end of its useful life

2. Choose a depreciation method

Next, choose a depreciation method for the asset. Methods can vary based on the asset type and how it wears out over time. These are some of the most used methods:

• Straight-line depreciation: Allocates an equal amount of depreciation over the asset's useful life
• Declining balance depreciation: Allocates higher depreciation expenses in the early years of the asset's life
• Units of production depreciation: Calculates depreciation based on the asset's usage or output instead of time
• Sum-of-the-years’ digits depreciation: Allocates higher depreciation expenses in the early years of usage, using a fraction based on the sum of the asset's useful life digits

3. Calculate the depreciation expense

Once you have your data and chosen depreciation method, use the corresponding formula to calculate the annual depreciation expense.

For example, if you choose straight-line depreciation, the formula is: 

(Asset cost - Salvage value) / Useful life = Annual depreciation expense

(We’ll look at a more in-depth example below.)

Now you’re ready to record the depreciation journal entries for the period.

How to record depreciation journal entries

Recording depreciation journal entries is an important part of keeping your financial records accurate and transparent. It ensures your books comply with accounting standards while aligning the cost of an asset with the periods it benefits. Let’s break it down step-by-step:

1. Once you’ve calculated the depreciation amount for the asset, determine the accounts involved (including depreciation expenses and accumulated depreciation accounts).
2. Debit the depreciation expense on your income statement. This entry reflects the cost of using the asset during the period. It shows up as an expense on your income statement, helping you match the cost of the asset to the revenue it’s helping to generate.
3. Credit the accumulated depreciation on the balance sheet. This entry adds to the accumulated depreciation account, which offsets the fixed asset on the balance sheet. It reduces the net book value of the asset, giving you a clearer view of its current worth.

Making sure your depreciation journal entries are recorded correctly helps you stay on top of your fixed asset management. It’s also key to providing accurate financial reports that reflect the true value of your business assets.

Depreciation expense journal entry examples

Now that we know the process, let’s review examples of depreciation journal entries.

Let’s say your business purchased office furniture for $12,000 on January 1. The equipment has a useful life of 5 years and a $2,000 salvage value. We’ll review how to calculate and record depreciation using several methods. 

Straight-line depreciation example

Let’s say you’ve chosen the straight-line depreciation method, which allocates the cost evenly over the asset’s useful life. First, let’s calculate the annual depreciation expense using the straight-line depreciation formula:

(Asset cost - Salvage value) / Useful life

(12,000 – 2,000) / 5 years = $2,000 per year

Now that we have our annual depreciation expense, let’s make the depreciation journal entries for the end of the year:

This entry debits the depreciation expense, recording it as a cost on your income statement, and credits accumulated depreciation, reducing the book value of the office furniture on the balance sheet.

Double-declining depreciation example

The double-declining balance method spreads out depreciation more heavily in the earlier years of an asset’s life. It’s useful for assets that lose value faster when they’re new, like technology or machinery. 

To calculate depreciation, you’ll double the straight-line depreciation rate and apply it to the asset’s book value at the start of each year.

Here’s how it works for the same office equipment:

1. Find the straight-line rate: 1 / useful life = 1 / 5 = 20%
2. Double the rate: 20% x 2 = 40%
3. Apply that rate to the book value for the first year: $12,000 x 40% = $4,800 depreciation expense

Now, let’s record the journal entry for the first year:

Units of production depreciation example

The units of production method ties depreciation to how much the asset is used instead of how long you’ve had it. It’s a great fit for equipment or machinery where wear and tear depends on activity rather than time, such as manufacturing robots or printing presses.

Let’s say the office equipment is expected to last for 15,000 hours of use. In the first year, it’s used for 3,000 hours. Here’s how we calculate depreciation:

1. Determine the depreciation per unit: 

(Asset cost - Salvage value) / Total units of production
($12,000 - $2,000) / 15,000 hours = $0.67 per hour

2. Multiply that rate by the actual usage: 3,000 hours x $0.67 = $2,010 depreciation expense

Now, here’s the journal entry for the first year:

This method ensures the expense reflects how much the asset contributed to operations. It’s especially useful for assets with varying levels of use.

Sum-of-the-years’ depreciation example

The sum-of-the-years’ digits method is another way to allocate higher depreciation in the early years of an asset’s life. It involves a fraction based on the remaining years of the asset’s useful life compared to the total sum of the years.

Let’s break it down for the office equipment:

1. Add up the years: 5 + 4 + 3 + 2 + 1 = 15
2. Find the fraction for the first year: Useful years remaining / Sum of the years = 5 / 15
3. Multiply it by the depreciable base (asset cost - salvage value):

($12,000 - $2,000) x (5 / 15) = $3,333 depreciation expense for the first year

Now, we’ll record the journal entry for the first year:

Impact of depreciation on financial statements

As you can see in the examples above, depreciation impacts various accounts and financial statements. Let’s take a closer look at the impact:

• Balance sheet: Depreciation reduces the book value of assets while increasing the accumulated depreciation account. As a result, the net worth or the total assets of the company decreases over time, reflecting the gradual usage of assets.
• Income statement: Depreciation is recorded as an expense, reducing the company's overall profits. Although it's a non-cash expense, it affects net income, contributing to a more accurate depiction of a company's profitability.
• Cash flow statement: Depreciation is added back to the net income in the operating activities section of the cash flow statement. This adjustment ensures that only cash flows are reflected in this statement, presenting a more accurate view of the company's liquidity.

Fixed asset carrying cost vs. market value

Carrying cost refers to the value of an asset as it appears on the balance sheet. It’s calculated as the original purchase price minus accumulated depreciation. In accounting, carrying cost provides a clear picture of an asset’s book value over time.

Market value, on the other hand, is the price the asset could sell for in the current market. Unlike carrying cost, market value can change based on factors like demand, condition, or broader economic trends.

Depreciation reduces the carrying cost of an asset every accounting period, but market value doesn’t always align with those changes. For example, an asset’s market value could be higher if it’s in high demand or lower if it’s outdated or hard to sell.

Understanding how carrying cost and market value differ helps businesses make informed decisions about asset management, such as when to sell or replace an asset. It also ensures financial statements accurately reflect the true economic value of assets.

Learn more about depreciation journal entries

Find the answers to commonly asked questions about depreciation journal entries.

What is the difference between depreciation expense and accumulated depreciation?

A depreciation expense represents the portion of an asset's cost that is allocated as an expense in a specific accounting period, reflecting its gradual loss of value. This expense appears on the income statement and helps match the asset’s cost to the revenue it generates.

Accumulated depreciation, on the other hand, is the total depreciation recorded for an asset since it was acquired. It’s a contra-asset account on the balance sheet that offsets the asset’s original cost, providing a more accurate picture of its net book value. Over time, as more depreciation is recorded, the accumulated depreciation balance increases until it equals the asset’s original cost, at which point the asset is considered fully depreciated.

Where is depreciation recorded on the balance sheet?

Depreciation itself is not recorded as a direct line item on the balance sheet. Instead, it is reflected through the accumulated depreciation account, which is a contra-asset account that offsets the corresponding asset’s original cost.

On the balance sheet, assets are listed at their original cost, but accumulated depreciation is subtracted to show the net book value (or carrying value) of the asset. This net amount represents the asset’s remaining value after accounting for depreciation. Typically, the carrying value is presented as a separate line item under property, plant, and equipment (PP&E) or fixed assets.

How do changes in useful life or salvage value impact a depreciation journal entry?

If the useful life is extended or salvage value changes, you may need to revise the depreciation expense calculations. The revised calculations would then be reflected in the subsequent journal entries.

Making these adjustments manually can be time-consuming. Fixed asset accounting software can make it easier with automated depreciation schedules. NetAsset empowers accountants with the tools they need to streamline workflows so they can focus on strategic initiatives.

What happens if an asset's value increases after its initial recognition and depreciation?

If an asset’s value increases, this increase is not included in the depreciation journal entry. Instead, the increase is recorded separately—typically as a revaluation adjustment or appreciation—to reflect the asset’s new fair value on the balance sheet. 

However, unless accounting standards allow for revaluation-based depreciation, the depreciation calculations continue based on the asset’s original cost and remaining useful life, rather than its newly adjusted value.

Do you reduce assets with depreciation?

Yes, depreciation reduces the reported value of assets over time. It’s recorded through the accumulated depreciation account, which offsets the asset’s original cost on the balance sheet. This process ensures your financial statements reflect the declining value of assets as they age or are used. 

However, depreciation doesn’t impact the asset’s physical condition or its market value—it’s purely an accounting process to allocate cost.

What is the formula for depreciation?

The depreciation formula you use depends on the method you select. For straight-line depreciation, which is one of the most common approaches, the formula is:

(Asset cost - Salvage value) / Useful life

This formula gives you the annual depreciation expense. Other methods, like double-declining balance or units of production, use different formulas tailored to how the asset’s value decreases over time or how it’s used. Each method helps match the expense to the asset’s usage or benefit during the accounting period.

What is the capitalization limit for depreciation of fixed assets?

The capitalization limit, often called the "cap limit," is the minimum dollar amount a company sets to determine whether a purchase is recorded as an expense or an asset. It’s a straightforward rule: if the cost of an item is below the limit, it’s treated as an expense. If it’s above, it’s recorded as a fixed asset and depreciated over time.

For instance, if your business sets a $5,000 cap limit, any purchase under $5,000 is expensed immediately. Anything over $5,000 is capitalized and gradually depreciated across its useful life.

Having a clear capitalization limit keeps your financial reporting consistent and ensures small, lower-cost items don’t clutter your fixed asset records. It’s also a practical way to stay aligned with accounting standards like GAAP or IFRS, which encourage businesses to apply simple, systematic processes for managing fixed assets.

Simplify asset depreciation with NetAsset

Depreciation is vital to accounting for your company’s fixed assets correctly. But it doesn’t have to be complicated.

While fixed asset spreadsheets can quickly become unmanageable as your asset portfolio grows, the right software can make the process more efficient with automated depreciation schedules and centralized data.

NetAsset (available for NetSuite or any ERP) is a user-friendly fixed asset management solution created to simplify the entire fixed asset lifecycle, from asset creation to tax reporting.

It saves accounting teams valuable time by simplifying complex calculations and reducing manual errors, giving you confidence in your financial reports.

Discover how you can transform your fixed asset management processes with NetAsset.