Accumulated Depreciation

When prepaid insurance is debited to an expense account the offsetting credit is to the asset account, as described in the preceding section. The procedure for long-lived assets is different. Instead of crediting the asset account directly, the credit is to a special account called Accumulated Depreciation.

Such an account is called a contra account because it records a decrease that basically belongs to another account. Accumulated Depreciation represents decreases that you could make directly to the asset account. The debit and credit rules for a contra account are those that apply if the entry had been made to the account for which it is the "contra." Since decreases in asset accounts are credits, increases in the contra accounts are credits.

With this procedure, the balance sheet reports both the original cost of the asset and the accumulated depreciation to date. The difference between Accumulated Depreciation and the original cost of a long-lived asset is called net book value.

Note that the depreciation expense for an asset is the same each month, but that Accumulated Depreciation increases by the amount that is added to it each month. So for the previously illustrated asset, depreciation expense for the 90th month - that is, 3/4 of the way through the asset's life of 120 months - would be €100, just as in every other month, but Accumulated Depreciation would be reported as €9,000 (90 months x $100). When Accumulated Depreciation builds up so that its total equals the original cost of the asset, you should not record any more depreciation expense. At that time, depreciation stops, even if you are still using the asset.

Artemis Accounts can make the straight line depreciation entries automatically each month as part of the adjusting entries, provided you have set up recurring journal entries. For this asset, the entry each month would be:

Dr. Depreciation Expense  

Cr. Accumulated Depreciation  


Alternatively, you can use the Asset Depreciation function in the Nominal/General module to have the system calculate and post the depreciation for any item in the Asset Register. This function provides three common methods of calculating depreciation.