Recording Depreciation

Using the example from the previous post on calculating depreciation, let’s look at how to record a depreciation expense.

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
Accumulated depreciation of Motor Vehicle
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.


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