Add Depreciations
Depreciation measures a fixed asset's loss of value over its useful life. For example, a car loses value every year due to general wear and tear. The original value of the car is kept in the original asset account, while the car's ongoing loss of value is recorded in a special asset account called "accumulated depreciation". Each fixed asset can have its own accumulated depreciation account, or you can use a single accumulated depreciation account for all fixed assets.
Although it's an asset account, accumulated depreciation has a normal credit balance. A credit to the account increases the amount of value lost. When printing the balance sheet, the accumulated depreciation is subtracted from the original asset to determine the asset's net value.
- Straight-line method—The original value of the asset is divided by the number of years of its useful life.
- Double-declining balance—Greater amounts of depreciation are recorded in earlier years, which accelerates the depreciation process. The formula for a double-declining balance is
(1/useful life in years) x 2 = % taken. - Sum of years' digits (SYD)—Add together the years of useful life, and then work backwards by dividing each year into the total. For example, if an asset has 5 years of useful life, add
5+4+3+2+1for a total of 15. The first year's depreciation rate is5/15(33%), the second year's rate is4/15(27%), and so on.
You can depreciate the annual amount at one time each year, or you can divide the annual amount by 12 and depreciate once for each month. Depreciation is recorded as a credit to the accumulated depreciation account and as a debit to the depreciation expense account. The depreciation expense account records the total amount depreciated this year for all assets.