How to Close Out Depreciation Expense at Year-End

Closing out depreciation expense at year-end is a crucial step in ensuring your financial records are accurate and up-to-date.

You can close out depreciation expense by reversing the accumulated depreciation account and reclassifying it to a long-term asset account, such as property, plant, and equipment.

This process typically occurs at the end of the fiscal year, when the company's financial statements are being prepared for audit and review.

Reversing the accumulated depreciation account can be done by creating a reversing entry, which is a journal entry that reverses the previous year's depreciation expense.

Accumulated depreciation is removed from the accounting records when a related fixed asset is no longer part of the company's operations. There are specific scenarios where you might eliminate accumulated depreciation.

You eliminate accumulated depreciation when an asset is sold, and both the asset and its associated accumulated depreciation are removed from the balance sheet. Any gain or loss from the sale is recorded in the income statement.

Accumulated depreciation is also removed when an asset is retired, scrapped, or disposed of without any sale proceeds. In this case, both the asset's original cost and its accumulated depreciation are removed from the balance sheet.

Asset exchange is another scenario where accumulated depreciation is removed. When an asset is exchanged for another asset in a non-monetary transaction, the book value of the old asset, which includes its accumulated depreciation, is usually removed from the balance sheet.

If an asset is fully depreciated but still in use, the accumulated depreciation account remains on the balance sheet but generally stops increasing. No more depreciation expense is recognized for that asset.

To eliminate accumulated depreciation, you need to calculate the carrying amount of the asset, which is its original cost minus the accumulated depreciation. You also need to determine the fair value of any consideration received for the asset and any costs directly attributable to the disposal.

The following scenarios require specific journal entries to eliminate accumulated depreciation:

Here are the steps to follow for each scenario:

1. Determine the carrying amount of the asset.

2. Identify the transaction details, including the fair value of any consideration received and any costs directly attributable to the disposal.

3. Calculate the gain or loss from the disposal.

4. Make the necessary journal entries to update the financial statements.

5. Comply with relevant accounting standards and make necessary disclosures in the financial statements.

For example, if an asset is fully depreciated and disposed of, the following journal entry must be made to reverse the accounts:

Journal entries for asset disposal are a crucial part of closing out depreciation expense. To accurately record the disposal of an asset, you need to understand the different scenarios that require an asset disposal.

Motors Inc. owns a machinery asset worth $3,000, which was initially estimated to have a useful life of three years with an annual depreciation expense of $1,000. At the end of the third year, the machinery is fully depreciated and must be disposed of.

To reverse the accounts, a journal entry is made to write off the asset's value and the accumulated depreciation. The asset's account is initially a debit account, while the accumulated depreciation is a credit account.

Accumulated depreciation is eliminated or removed from the accounting records in specific situations, including the sale of the asset, asset retirement or disposal, asset exchange, fully depreciated asset still in use, and asset revaluation.

To eliminate accumulated depreciation, you need to determine the carrying amount of the asset, which is its original cost minus the accumulated depreciation. For example, if the machinery's original cost is $3,000 and the accumulated depreciation is $3,000, the carrying amount would be $0.

The following steps are taken to eliminate accumulated depreciation:

1. Determine Carrying Amount: Calculate the carrying amount of the asset.

2. Identify Transaction Details: Determine the fair value of any consideration received (if applicable) for the asset and any costs directly attributable to the disposal.

3. Calculate Gain or Loss: Gain or loss is calculated as the difference between any proceeds received and the carrying amount of the asset.

4. Journal Entries: Make the necessary journal entries to update the financial statements.

Here's a summary of the steps to eliminate accumulated depreciation:

By following these steps and making the necessary journal entries, you can accurately record the disposal of an asset and close out depreciation expense.

It's essential to start the year-end closing process early to ensure accurate financial statements and avoid missing deadlines. As Melissa Howatson, CFO of Vena Solutions, advises, "Go through all the balance sheet accounts throughout the year to see if there's anything to action early."

The goal of year-end closing is to ensure financial statements accurately reflect a company's financial activities for the accounting year. This involves reviewing income, expenses, assets, liabilities, and equity changes, as well as accruals, depreciation, bad debt provisions, and tax adjustments.

The year-end closing process can be divided into several key steps:

By following these steps and starting the year-end closing process early, accounting and finance teams can ensure accurate financial statements and avoid common pitfalls.

Accurate financial statements depend on reviewing your assets, so take the time to gather data on all company assets, including tangible and intangible ones.

Tangible assets such as property, equipment, vehicles, and furniture need to be factored into your balance sheet.

Intangible assets like patents, trademarks, and copyrights that the company has acquired, not generated, should also be included on the balance sheet.

Go over the value of each asset to ensure they're accurate, as this step ensures your financial statements reflect the true value of your assets.

To ensure accuracy, consider using a Fixed Asset Reconciliation Schedule, which can be found as a pre-built template within Vena for Account Reconciliation.

Here's a breakdown of the types of assets to review:

Close PD is a critical step in the year-end closing process. You can select this radio button to close the period after testing for unposted depreciation and/or disposals.

However, if the testing process locates any unposted depreciation or selected disposals, the Close PD radio button remains disabled until you post and run Test again.

This is because the closing process stops if it encounters any unposted depreciation or disposals. You must post the depreciation and/or disposals, and then test the period data again before you can close.

The Close PD radio button is initially disabled, and it remains that way until you've tested the period data.

Depreciation is a business expense that's recorded on the debit side of the profit and loss account. It's also a reduction in the value of a particular asset, which is deducted from the associated asset's account in the balance sheet.

Depreciation has two main effects on final accounts: it's a business expense and a reduction in asset value.

K & Co. purchased furniture costing $2,500 on 1 January 2016, with a salvage value of zero and depreciation provided at 10% p.a. on the original cost.

To record depreciation, you'll need to calculate the annual depreciation charge, which can be done using the straight-line method or the declining balance method.

The journal entries for asset disposals depend on the situation, such as selling, trading, or scrapping an asset.

Motors Inc. owns a machinery asset on its balance sheet worth $3,000.

Here are the key points to remember about accounting treatment of depreciation and asset disposals:

When reviewing your assets, gather data on all company assets, including tangible and intangible assets, and ensure their values are accurate.

A Fixed Asset Reconciliation Schedule can help you review and verify the accuracy of your assets' values.

To close out depreciation expense, you need to make an adjusting entry, which involves debiting depreciation expense and crediting accumulated depreciation.

The depreciation expense appears on the income statement like any other expense, and it's essential to record it correctly to maintain accurate financial records.

Accumulated depreciation is a contra asset account that is shown as a deduction from the cost of the related asset in the balance sheet.

The adjusting entry for depreciation expense is made on a specific date, such as December 31, 2016, as shown in the example.

To record the purchase of a fixed asset, you would debit the asset account and credit cash, and then make an adjusting entry for depreciation expense on the same date.

The purchase of a fixed asset is shown as a fixed asset on the balance sheet on the date of purchase, and the accumulated depreciation is shown as a deduction from the cost of the asset.

The balance sheet on December 31, 2017, will show the same fixed asset with increased accumulated depreciation, reflecting the depreciation expense recorded over the past year.

The adjusting entry for depreciation expense is an essential step in closing out the expense and maintaining accurate financial records.