What is Depreciation?
Most supplies that a business purchases to use in the course of operations are expenses, and directly deducted from the income earned in the same time period. Capital assets are different; they are recorded to an asset account on the balance sheet, and the cost of the asset is converted into expense over time as it is used. This is called depreciation.
For example, let’s say you buy a laptop for €2.000 when you start your own consulting business. You categorize that laptop to a Property, Plant, and Equipment asset account called “Laptop.” You expect to use it for 3 years before getting a new one. At the end of the first year of your business, you then expense ⅓ of the cost of the laptop, or €667, as depreciation, and on your balance sheet, the laptop value less the depreciation would be €2.000 - €667, or €1.333.
The calculation of depreciation can be complex, as the method and useful asset life are often determined by a regulatory entity, so we recommend consulting with an accountant.
How to Set Up Accounts for Recording Depreciation:
- From the left-side menu, click Accountant > Chart of Accounts,.
- Click 'New Account' in the upper-right corner.
- Set the following:
- Account Type: Liabilities.
- Category: Other Financial Liabilities.
- Name: Accumulated Depreciation. - Click 'Save' to create the account.
How to Record Depreciation:
- Navigate to Accountant > Journal Entries.
- Click 'New Entry' in the upper-right corner.
- In the Description field, enter something like “Annual Depreciation Expense” and select the appropriate date (typically the end of a year, quarter, or month).
- Under the Debit column, select Depreciation Expense as the category and enter the depreciation amount.
- Under the Credit column, select Accumulated Depreciation as the category and enter the same amount as the debit.
- Click 'Save' to record the entry.
You're all done! You've now recorded accumulated depreciation on your asset.
