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Q: Confused in Maryland ( Answered,   1 Comment )
Question  
Subject: Confused in Maryland
Category: Business and Money > Accounting
Asked by: fieryone-ga
List Price: $5.00
Posted: 26 Feb 2006 08:56 PST
Expires: 28 Mar 2006 08:56 PST
Question ID: 701140
Is depreciation entered into a journal as a debit or a credit?  
How is the original price of equipment entered into a journal, as a
debit or a credit?
How is the new price entered, as a debit or a credit?
Answer  
Subject: Re: Confused in Maryland
Answered By: weisstho-ga on 26 Feb 2006 14:43 PST
 
Dear fieryone,

Well, its Sunday afternoon now, and I would be happy to help. 

Let's make an assumption for our problem:  XYZ purchases a
manufacturing machine for $500,000 that has a 5 year life. At the end
of 5 years the poor machine is just worn out and has to be scrapped.
It will have no value at the end of the 5 years and the cost of
disposal are minimal.

It wouldn't make sense to "write-off" the entire machine in the first
year, the year of acquisition, would it?  XYZ's profit would be hugely
distorted by having a one-time $500,000 expense.  As accounting's
"Matching Principle" says, we want to match revenues with the costs of
production, so as our revenues are benefited from having this machine
around for 5 years, so must our expenses that we offset against those
revenues be allocated over the 5 years.

DO WE DEBIT OR CREDIT?

Think of cash. Cash has a DEBIT balance. Relate to cash. 

When we buy the machine, paying cash we:
DEBIT: ASSETS-MACHINERY $500,000
CREDIT:  CASH $500,000

We know that depreciation will be $100,000 per year, don't we? 
($500,000 / 5 = $100,000 per year).

And we can intuit that we want the machine's value, on the balance
sheet, at the end of the first year to be $500,000 cost - $100,000
depreciation = $400,000 remaining book value.

At the end of the first year, then:  
DEBIT:  DEPRECIATION EXPENSE $100,000
CREDIT:  ACCUMULATED DEPRECIATION - ASSETS - MACHINERY $100,000

And then the balance sheet would show:
ASSET - MACHINERY - $500,000
LESS ACCUMULATED DEPRECIATION - ASSETS - MACHINERY $100,000
     [NET BOOK VALUE = $400,000]

At the end of the second year, then
DEBIT:  DEPRECIATION EXPENSE $100,000
CREDIT:  ACCUMULATED DEPRECIATION - ASSETS - MACHINERY $100,000

And then the balance sheet (at the end of the second year) would show:
ASSET - MACHINERY - $500,000
LESS ACCUMULATED DEPRECIATION - ASSETS - MACHINERY $200,000
     [NET BOOK VALUE = $300,000]

AND SO FORTH

THE ANSWERS THEN: 
1.  Is depreciation entered into a journal as a debit or credit? 
ANSWER:  DEPRECIATION EXPENSE IS A DEBIT - IT IS A NORMAL EXPENSE
ACCOUNT. ALL NORMAL EXPENSES ARE DEBITS AND ALL NORMAL REVENUES ARE
CREDIT ACCOUNTS.

2.  How is the original price of equipment entered into a journal, as
a debit or credit?  ANSWER:  EQUIPMENT IS AN ASSET. NORMAL ASSETS ARE
CARRIED AS DEBIT BALANCES, WHERE LIABILITIES AND EQUITY ARE CARRIED ON
A BALANCE SHEET AS A NORMAL CREDIT BALANCE.

NOTE:  THE ACCUMULATED DEPRECIATION, WHICH REDUCED THE DEBIT BALANCE
EQUIPMENT BALANCE HAS A CREDIT BALANCE. IT IS NOT A LIABILITY OR
EQUITY, IS IT. IT IS A "CONTRA-ASSET."

3.  How is the new price entered, as debit or credit. ANSWER:  NOT
SURE WHAT YOU MEAN . . . THE NET BOOK VALUE (THE AMOUNT AFTER
ACCUMULATED DEPRECIATION IS DEDUCTED FROM THE ASSET ACQUISITION PRICE
IS CERTAINLY A DEBIT. IT HAS SOME VALUE - AND IT IS AN ASSET,
THEREFORE IT MUST HAVE A DEBIT BALANCE.

Here is a pretty good site defining terms:
http://www.innovationavenue.com/finance-accounting-glossary.htm

I hope I was a help. I hope you are not un-confused. I think, though,
I missed whatever you meant in your third part of the question - if so
- hit the CLARIFICATION BUTTON and I'll get right back to you.

weisstho-ga
Comments  
Subject: Re: Confused in Maryland
From: myoarin-ga on 26 Feb 2006 09:17 PST
 
It is Sunday morning, but just open the book and start reading.
We are not supposed to do homework.

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