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The straight-line depreciation method evenly disperses the wear-and-tear on the equipment over the course of the equipment's life.
Scenario: On March 1st you buy a lemon squeezer for $240. The journal entry representing the purchase looks like so:
Each year of use, your lemon squeezer takes on $60 of depreciation. Write the adjusting entry on March 31st for the first month of depreciation on the lemon squeezer.
The blue underlined text signals...
- Write the adjusting entry on March 31st for the first month of depreciation. ➡️ We'll expense this cost of running our business through Depreciation Expense.
- This depreciation is diminishing the value of our lemon squeezer. ➡️ We'll store that "decrease of value" in Accumulated Depreciation (as a contra-asset).
Annual Depreciation = $60
Monthly Depreciation = Annual Depreciation / 12 months
Monthly Depreciation = $60 / 12 months
Monthly Depreciation = $5
The reason is...
- We have incurred an expense (+) through the depreciation on our lemon squeezer as a cost of running our business.
- This is represented through Depreciation Expense.
- Which is an expense account, and therefore has a normal debit balance.
- So, to increase it by $5, we'll debit it.
ACCRUAL BASIS REMINDER: Before we enter the next period (April) we must record the depreciation on our lemon squeezer over the current period (March) to follow accrual basis accounting.
The reason is...
- We have accumulated (+) wear-and-tear (a.k.a. depreciation) on our lemon squeezer.
- This is represented through Accumulated Depreciation.
- Which is a contra-asset account, and therefore has a normal credit balance.
- So, to increase it by $5, we'll credit it.
