Depreciation is the process of expensing the cost of an asset over its useful life. The computation takes asset cost, useful life and salvage value into account to estimate the breakdown of expense over a period of time. No determination of the asset's value is involved in this process; only the cost at time of purchase matters. Depreciation is usually computed using the straight-line, units-of-activity or declining-balance methods. As each of these methods are accepted under generally accepted accounting principles, each company must select the appropriate method for its needs.
- Skill level:
Enter depreciation transactions for new purchases using the new depreciation method. Debit the "Depreciation Expense" account and credit the "Accumulated Depreciation" account as usual. No additional accounts are necessary.
Continue to enter depreciation using the old method for existing assets. Because there is no adjustment to past depreciation transactions, the total amount of depreciation expense will change slowly over time.
Include an explanation of the change in depreciation method and why it was made in the "Notes to the Financial Statements" section of your financial reports.
Calculate the total depreciation expense and accumulated depreciation to date for each current asset using the new depreciation method.
Create an adjusting entry for each asset, adjusting the "Depreciation Expense" and correlating "Accumulated Depreciation" accounts. For example, changing from the straight-line method to the double-declining method would require a debit to "Depreciation Expense" and a credit to the asset's "Accumulated Depreciation" account in the amount of the difference in the straight-line depreciation and the double-declining depreciation expense to date.
Enter all new assets using the new depreciation method and include a section in the "Notes to the Financial Statements" section explaining the reason for the change.
Tips and warnings
- Changing your depreciation method directly affects your balance sheet through accumulated depreciation and your income statement through depreciation expense. That means a change in depreciation method that increases past depreciation will decrease both your total assets and net income for the year.
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