Depreciation spreads an asset's cost across the years it serves, recognising a slice of the cost as an expense each period rather than all at once. It is how the books admit that an asset wears out, so profit is not overstated in the year you buy and understated ever after.
- The depreciation method used
- How a depreciation run is generated and posted
- What accumulated depreciation is
How it behaves
Method and frequency
Depreciation here is straight-line: an equal slice of the cost, set by a rate, written off each period until the asset is fully depreciated (or it can be set to none for assets you do not depreciate). The frequency can be yearly, monthly or daily, and an asset becomes eligible for a run once its frequency has elapsed since the last one.
The run and the posting
Generating a depreciation run gathers every eligible active asset into a draft document, one line each, with the value before, the amount, and the value after. Posting the run debits depreciation expense and credits accumulated depreciation, the contra-asset that sits against the asset account and reduces its net book value. The run goes Draft, Verify, Posted.
Worked example
Your 60,000 van depreciates straight-line over five years, monthly. Each run posts 1,000 to depreciation expense and 1,000 to accumulated depreciation, so after a year the van's net book value has fallen by 12,000.
Edge cases and good practice
- Run on a consistent frequency; eligibility is driven by the period elapsed.
- Accumulated depreciation is a contra-asset, not an expense; the expense is the period charge.
- Plan around straight-line, the available method.
Related
- How to: Run depreciation
- Reference: Assets
- Reference: Chart of Accounts (the ledgers)