Journal Entries For Depreciation: Practical Guide for Business Success

Depreciation is recorded by debiting depreciation expense and crediting accumulated depreciation, thereby systematically charging the asset's cost to the profit and loss account while reducing its book value over time. As an expense, it is treated as a nominal account, helping businesses measure true profit and reflect the gradual consumption of fixed assets across their useful life.

What is the basic journal entry for depreciation?

Every depreciation entry follows the same double-entry structure regardless of the method used:

The depreciation expense account sits on the debit side of the P&L statement and reduces net profit. Accumulated depreciation is a contra asset account: it appears on the balance sheet as a deduction from the fixed asset's gross value, giving you the net book value.

Journal entries under the straight-line method

The straight-line method (SLM) charges the same depreciation amount every year. The formula is:

Annual depreciation = (Cost of asset – Salvage value) ÷ Useful life (years)

Example

A company purchases machinery for ₹10,00,000. Estimated salvage value: ₹1,00,000. Useful life: 9 years.

Annual depreciation = (₹10,00,000 – ₹1,00,000) ÷ 9 = ₹1,00,000 per year.

This entry is repeated identically at the close of every financial year (FY) until the asset is fully depreciated or disposed of.

Journal entries under the written-down value method

The written-down value (WDV) method applies a fixed percentage to the net book value of the asset at the start of each year. The depreciation charge is highest in year one and falls every subsequent year.

Example

A vehicle purchased for ₹5,00,000 is depreciated at 20% WDV.

Journal entry for year 1:

In year 2, only the amount changes (₹80,000); the structure of the entry remains the same.

Journal entry when an asset is sold or disposed of

When you sell or scrap a fixed asset, you must clear both the gross asset account and the accumulated depreciation account from your books. A separate asset disposal account is used to calculate the gain or loss.

Entries on disposal

Assume the machinery from the SLM example is sold after 5 years for ₹6,00,000. After 5 years, accumulated depreciation = ₹5,00,000. Net book value = ₹5,00,000.

Step 1: Transfer the asset and accumulated depreciation to a disposal account.

Step 2: Record the sale proceeds and close the disposal account.

If the sale price were lower than the net book value, the difference would be a loss on disposal, debited to the P&L account.

Common errors to avoid

These mistakes appear frequently and can distort financial statements if not addressed:

• Forgetting to record depreciation at year-end which overstates asset values and understates expenses.
• Using the wrong useful life, especially when the Companies Act, 2013, prescribes limits for different asset classes.
• Changing depreciation methods mid-asset life without a formal policy change and disclosure under Ind AS 8.
• Not recording accumulated depreciation as a contra asset, which inflates the balance sheet.

Keeping depreciation entries consistent

Depreciation is not a one-time task; it must be recorded at the end of every accounting period, applied consistently across asset classes and reconciled with the asset register before finalising financial statements. A missed or incorrect entry does not affect just one year; it carries forward, creating discrepancies over time.

Tools like TallyPrime simplify this by allowing businesses to set depreciation methods and rates at the asset ledger level, enabling accurate calculations and automatic year-end posting.