Using the example from the previous post on calculating depreciation, let’s look at how to record a depreciation expense.Example Maxwell Smart owns and operates Smarties Trading. On 1 July 2010 Smart purchased a motor vehicle for $28,000. The vehicle will be traded in after three years, at which time it is estimated to have a residual value of $10,000. Using the formula for calculating as outlined in the previous post, the depreciation expense for the vehicle is $6000 pa.
To record this in the General Journal
|Jun 30||Depreciation of Motor Vehicle||6,000|
|Accumulated depreciation of Motor Vehicle||6,000|
|One year’s depreciation on Motor Vehicle|
The impact of this transaction on the reports of Smarties Trading would be to increase expenses by $6000, thus reducing profit by $6000.
In the Balance Sheet, Accumulated Depreciation is reported as a negative asset and is subtracted from the Motor Vehicle as shown below.Balance Sheet (extract) Non-current Assets Motor Vehicle 28,000 less Accumulated depreciation of Motor Vehicle 6,000 22,000
On the other side of the Balance Sheet, Owner’s Equity is reduced by $6000 because of the $6000 reduction in profit.