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What is Depreciation and Accumulated Depreciation with Example of Journal Entries


Depreciation is the expense therefore we need to decrease in the value of any fixed asset.



The reduction in value of an asset due to normal usage, wear and tear, new technology or unfavorable market conditions is called Depreciation. Assets such as plant and machinery, buildings, vehicles etc. which are expected to last more than one year, but not for the infinity are subject to depreciation.



Example :- Journal entry for depreciation



Depreciation A/C               Debit

   To Asset A/C                                   Credit

(Assuming no provision is maintained)



Rules applied in the above journal entry

•         Depreciation – Nominal Account – Dr. All expenses & losses

•         Asset – Real Account – Cr. What goes out



Transfer the Depreciation into Profit & Loss Account

                Profit & Loss A/C                              Debit

                 To Depreciation A/C                                       Credit



Example :- You sell the Car at Rs. 5,00,000. Its accumulated depreciation is Rs. 50,000. Its original cost is Rs. 600000.

a) cash account will be debited because cash comes in the business. Everything which comes in the business will be debit under second rule of double entry system.

b) Accumulated depreciation account will be debit because with this, liability will decrease. Accumulated depreciation was our liability.

c) Profit and loss account will be debit because this is the loss on sale car.

d) Original Cost of car will be credit because car goes from business.



Cash Account                                                     500000                                                  Debit

Accumulated Depreciation Account              50000                                                    Debit

Profit and Loss Account                                   50000                                                    Debit                    

Car Account                                                                                        600000                                  Credit


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