21-3: Journalizing Depreciation Expense
Just like a record is kept for each general ledger account, a separate record is kept for all plant assets. A plant asset record is an accounting form where information and depreciation for plant assets is recorded.
When a business purchases a plant asset, they journalize the transaction, will create a depreciation schedule for the life of the asset (example WT 21-1), and also prepare a plant asset record. Plant asset records may look different from business to business, but all generally have the same information on them.
There are three parts to a plant asset record. In Part I, all the detailed information about the asset is recorded: description, which general ledger account the asset will be recorded as (in this example, Store Equipment), the account number for that General Ledger account, the date it is bought, serial number, original cost, estimated useful life, estimated salvage value, and the depreciation method. Most of this information can be obtained from the invoice for the asset (or in our case in the instructions in the book.
Part II is only completed when an asset is discarded, sold, or traded. Here the date of disposal, value at time of disposal, and method of disposal are recorded. This section will be discussed in section 21-4.
Part III looks very similar to the depreciation tables created in the prior lesson. In this section, the year of depreciation, annual depreciation amount journalized, accumulated depreciation, and ending book value is recorded. The difference between this and the depreciation table in 21-2 is that you would only complete this portion of the depreciation schedule as you record depreciation. For example, at the end of 2001, you would complete this section for 2001 only. The next year, if you are still using the asset, the business would complete the information for 2002. The next year, if the business is still using the asset, the business would complete the information for 2003, etc. Why only record the information at the end of the year? In this example, the asset is expected to be used for 3 years. But what if it isn't used for 3 years? The business has it for 1 year, feels it is insufficient and wants to get rid of it. The listing of extra depreciation would be wasted in this case, because the asset would not be used in 2002 or 2003. Or what if the business decides to sell the asset in the middle of 2002? The asset would not be used for 12 months in that year, so should not be listed as depreciation for 12 months that year. The good news about this section is that you already created depreciation tables for these assets; all you have to do is transfer the information from the depreciation table to here, as long as you do not discard, sell, or trade the asset in the middle of the year.
Example WT 21-3: A plant asset record prepared for the Television for 2001-2003:
After the depreciation has been listed on all plant asset records, the company will make an adjusting entry on the worksheet to record the depreciation expense for each asset. How this is done, the accountant would take the plant asset records and sort them by the type of assets. All the office equipment would be placed together, all the store equipment would be placed together, and all the warehouse equipment would be placed together. Instead of making one entry for each plant asset (which could mean hundred of entries if the business owned many plant assets), the total annual depreciation expense from each office equipment card is added together for the year and an entry is recorded on the worksheet.
Example WT 21-3 (step 4) . According to the instructions on page 558, after the annual depreciation from all the office equipment plant asset records were added up, the business needs to record depreciation expense for $3,120 for that year (the total amount of ALL the office equipment assets annual depreciaton added together for that year).
The estimate is recorded in the worksheet as an adjustment and is labeled with a letter so it can be journalized easily later; the adjustment does not effect general ledger accounts until it is actually journalized and posted. Once the worksheet is complete, the adjusting entries are then recorded in the General Journal (see below). After all entries are journalized, entries are posted to the General Ledger to bring accounts up-to-date.
The two accounts used to record depreciation expense is Depreciation Expense--(type of asset) and Accumulated Depreciation--(type of asset). Let's say the type of asset in this case is "Office Equipment." A debit of $3,120 would be made to Depreciation Expense--Office Equipment. The credit part of the entry could be recorded to Office Equipment (or the related plant asset account), but this is not a good idea because later it will be hard to tell what was the original cost versus what it is worth now (book value). Instead of using Office Equipment, the business will create an account called Accumulated Depreciation--type of asset. It is a contra account to the plant asset record, and it would keep an accumulated total of the depreciation recorded to-date on an asset.