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While you’ve now learned the basic foundation of the major available depreciation methods, there are a few special issues. Until now, we have assumed a definite physical journal entry for depreciation or economically functional useful life for the depreciable assets. However, in some situations, depreciable assets can be used beyond their useful life.
No, a depreciation journal entry is not recorded for assets that are fully expensed under tax laws, such as those eligible for immediate expense or special tax deductions. These assets are treated as an expense in the year of purchase and do not require depreciation calculations or journal entries. Even if you’re using accounting software, if it doesn’t have a fixed assets module, you’ll still be entering the depreciation journal entry manually. For those still using ledgers and spreadsheets, you’ll also be recording the entry manually, but in your ledgers, not in your software.
When recording this expense, we use another account called accumulated depreciation. The accumulated depreciation is a contra account of fixed assets and the balance is carried forward throughout the life expectancy. The accumulated depreciation is deducted from the cost of the assets to find the net book value of the fixed assets. The declining balance method calculates depreciation based on a fixed percentage rate, which is applied to the asset’s book value each year. The declining balance rate is usually double the straight-line rate and is determined by dividing 100% by the useful life of the asset. Yes, a depreciation journal entry can be recorded for certain types of intangible assets with a finite useful life—such as patents, copyrights, or licenses.
These assets are considered natural resources while they are still part of the land; as they are extracted from the land and converted into products, they are then accounted for as inventory (raw materials). Natural resources are recorded on the company’s books like a fixed asset, at cost, with total costs including all expenses to acquire and prepare the resource for its intended use. This is one reason US GAAP has not permitted the fair valuing of long-lived assets.
Depreciation journal entries aid in efficient asset tracking, providing a clear picture of each asset’s lifecycle and the rate at which it’s depreciating, enabling proactive asset management. Remember that depreciation rules are governed by the IRS, and the method you choose to depreciate your assets will directly affect year-end taxes, so choose wisely. The method currently used by the IRS is the Modified Accelerated Cost Recovery System (MACRS). Like double declining, sum-of-the-years is best used with assets that lose more of their value early in their useful life.
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