Depreciation on Machinery: Accounting Equations

Depreciation is a method used in accounting to allocate the cost of an asset over its useful life. Machinery is one such asset that undergoes depreciation. Depreciation on machinery is recorded in the financial statements to accurately reflect the wear and tear or obsolescence of the asset over time. In this guide, we will explain the accounting equations related to depreciation on machinery in detail.

1. What is Depreciation?
Depreciation is the systematic allocation of the cost of an asset over its useful life. It represents the reduction in the value of an asset due to factors like wear and tear, aging, obsolescence, or changes in market conditions. Depreciation is considered an expense because it reduces the net income of a business.

2. Why is Depreciation on Machinery Recorded?
Machinery, being a long-term asset, provides benefits to a business over an extended period. However, it gradually loses value over time due to usage and technological advancements. To accurately reflect the decrease in the value of machinery, depreciation is recorded in the financial statements.

3. Accounting Equations for Depreciation on Machinery
There are various methods to calculate depreciation, such as straight-line method, declining balance method, or units of production method. Regardless of the method used, the accounting equations for depreciation on machinery remain the same.

a. Depreciation Expense
Depreciation expense represents the amount of depreciation allocated to a specific accounting period. It is recorded as an expense in the income statement and reduces the net income of the business.

b. Accumulated Depreciation
Accumulated depreciation is a contra-asset account that offsets the cost of machinery on the balance sheet. It represents the total depreciation recorded on the machinery since its acquisition. Accumulated depreciation is a credit balance and is deducted from the cost of machinery to determine its carrying value.

c. Carrying Value
The carrying value of machinery is the net value of the asset after deducting accumulated depreciation from its cost. It represents the remaining value of the machinery that has not been depreciated.

4. Journal Entries for Depreciation on Machinery
To record depreciation on machinery, the following journal entry is made:

Debit Depreciation Expense
Credit Accumulated Depreciation

This entry reduces the net income for the period and increases the accumulated depreciation account.

5. Impact on Financial Statements
Depreciation on machinery affects both the income statement and the balance sheet.

- Income Statement: The depreciation expense is recorded as an operating expense, reducing the net income of the business.
- Balance Sheet: The accumulated depreciation is deducted from the cost of machinery, resulting in a lower carrying value for the asset.

Conclusion
Depreciation on machinery is an essential accounting concept that helps businesses accurately account for the decrease in value of their assets over time. By following the appropriate accounting equations and recording depreciation expenses, businesses can provide a true and fair representation of their financial position and performance.

Amount of depreciation will be minus from the machinery account