Any enterprise has assets on its Balance sheet that are used for production and administrative purposes. During operation, these undergo natural wear and tear: furniture, appliances, industrial, commercial, office equipment, vehicles, and other fixed assets lose their original characteristics over time, become obsolete, their technical condition deteriorates, and, consequently, their cost also decreases.
When registering a property, it is assigned a certain value in monetary terms, initially equal to the purchase price, and, of course, it must be regularly adjusted downward. For this, the accounting department writes off part of the cost of fixed assets, which is called depreciation. Accordingly, depreciable assets are assets that are subject to such cost write-offs.
Why are depreciable assets important? Anything you buy for use in your business can be deducted as an expense on your tax return. Some assets that you buy can be deducted immediately (these are current assets), while other assets have a long-term life and these assets can be deducted over their years of life in the form of depreciation expense.
There are several common groups of depreciable assets that you should be aware of:
- premises, buildings, engineering networks
- equipment, tools, and devices
- office equipment, furniture
- breeding cattle, working animals
- perennial crops;
- intangible assets (objects of intellectual property).
Land plots and other natural resources, construction in progress, stock market instruments, and art objects are not subject to depreciation.
Let’s say your company bought a building for $500,000. You calculated that the depreciation for each year will be $10,500. Seven years later, you decide to sell the building and the buyer pays you $450,000 for it. What would journal entries for this depreciable asset look like?
First, we need to record the initial acquisition of the depreciable assets. Let’s assume your company purchases the asset with cash.
Next, your bookkeeper will record a depreciation expense every year. Below, you can see how the entries would look like. Note that the actual Building account is not touched until you either sell or scrap the depreciable assets.
After seven years, the Accumulated depreciation account will have a balance of $10,500 x 7 or $73,500, if using a straight-line depreciation method. Now, your company wants to sell this building. Since you no longer own the building once you sell it, you need to bring this account down with an opposing entry. You also need to close the Accumulated depreciation account by creating a debit entry under it.
As of right now, you have a total of $400,500 + $73,500 under debits and only $500,000. However, you probably know, debits and credits have to balance. To achieve this, you would create an additional entry for the difference between the debits and credits or $26,000. This will be your gain on the sale. If you had sold the building for $350,000, you would be $76,500 short and would need to record a loss.