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Q: Confused in Maryland ( Answered,   1 Comment )
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 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?```
 ```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```
 ```It is Sunday morning, but just open the book and start reading. We are not supposed to do homework.```