Depreciation of Fixed Assets

How to Calculate the Depreciation of Fixed Assets

If for example, a business has purchased furniture with a value of 4,000 and expects it to have a useful life of 4 years and a salvage value at the end of that time of zero, then the simple straight line depreciation of fixed assets would be calculated as follows:

depreciation of fixed assets formula

In this example the depreciation expense is calculated as follows.

Depreciation expense = (Cost of asset - Salvage value) / Useful life
Depreciation expense = (4,000 - 0) / 4 = 1,000

In this example the depreciation expense is 1,000 per year for the next 4 years.

Journal Entry for the Depreciation of Fixed Assets

The depreciation expense is calculated at the end of an accounting period and is entered as a journal as follows:

Depreciation of Fixed assets
Account Debit Credit
Depreciation expense 1,000
Accumulated depreciation 1,000
Total 1,000 1,000

Depreciation of Fixed Assets Entries Explained

Profits, which belonged to the owners of the business, have been set aside and retained within the business to pay for replacement fixed assets.

The accumulated depreciation account is established to record the ‘liability’ of the business to pay for replacement fixed assets in the future.

The Accounting Equation

The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the owners equity in the business. This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.

Depreciation of Fixed Assets Accounting Equation
Assets = Liabilities + Owners Equity
Fixed Assets = None + Retained earnings
– 1,000 = 0 + -1000

The credit entry to the accumulated depreciation account (a contra asset account), causes the net book value of the fixed assets to be reduced.

The debit to the depreciation expense will reduce the net income and retained earnings of the business resulting in a decrease in the owners equity.

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Last modified October 21st, 2019 by Michael Brown

About the Author

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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