Definition of Depreciation Accounts
There are two types of general ledger accounts in which depreciation is recorded:
- Depreciation Expense which is a temporary account since it is an income statement account . As a temporary account, Depreciation Expense will begin each accounting year with a zero balance and will have its balance at the end of the year closed to an equity account such as a corporation's retained earnings or a proprietor's capital account.
- Accumulated Depreciation which is a balance sheet contra asset account and its balance is not closed at the end of each accounting period . As a result, Accumulated Depreciation is viewed as a permanent account.
- Debit $5,000 to the temporary, income statement account Depreciation Expense
- Credit $5,000 to the permanent, balance sheet, contra-asset account Accumulated Depreciation
Example of Depreciation Accounts
Assume a company has equipment which is used in its business. The equipment's cost was $600,000 and is expected to last for 10 years at which time it will be scrapped for no salvage value. Using the straight-line depreciation method, the monthly depreciation will be $5,000 per month ($600,000/120 months). Therefore, each month for 10 years the company will record the following adjusting entry: