What is Depreciation Expense?

Depreciation expense is that portion of a fixed asset that has been considered consumed in the current period. This amount is then charged to expense. The intent of this charge is to gradually reduce the carrying amount of fixed assets as their value is consumed over time. This is a non-cash expense; that is, there is no associated cash outflow.

Accounting for Depreciation Expense

When an entry is made to the depreciation expense account, the offsetting credit is to the accumulated depreciation account, which is a contra asset account that offsets the fixed assets (asset) account. The balance in the depreciation expense account increases over the course of an entity's fiscal year, and is then flushed out and set to zero as part of the year-end closing process. The account is then used again to store depreciation charges in the next fiscal year. The same concept is used for intangible assets, where the associated expense account is referred to as amortization expense.

Example of Depreciation Expense

Entwhistle Electric makes compact batteries for mobile applications. It has recently built a new battery assembly line that produces very small batteries for smart watches, at a cost of $1,200,000. This includes the cost to acquire equipment, have it shipped to the company’s location, installed, and tested. The accounting staff believes that the assembly line asset will have a useful life of only five years, since this is a rapidly-evolving field. It is also expected that the asset will have no salvage value at the end of that time, and will have to be scrapped. Based on this information, the asset will need to be depreciated at a relatively rapid rate of $240,000 per year, or $20,000 per month. By doing so, the entire $1,200,000 amount of the asset will have been depreciated at the end of five years. The monthly depreciation journal entry is as follows: