Monthly or annual depreciation, amortization and depletion are used to reduce the book value of assets over time as they are "consumed" or used up in the process of obtaining revenue.These non-cash expenses are recorded in the accounting books after a trial balance is calculated to ensure that cash transactions have been recorded accurately. Depreciation is used to record the declining value of buildings and equipment over time. Land is not depreciated. Amortization is used to record the declining value of intangible assets such as patents. Depletion is used to record the consumption of natural resources.
Depreciation, amortization and depletion are recorded as expenses against a contra account. Contra accounts are used in bookkeeping to record asset and liability valuation changes. "Accumulated depreciation" is a contra-asset account used to record asset depreciation.
Sample general journal entry for depreciation
- Depreciation expenses: building... debit = $150, under expenses in retained earnings
- Accumulated depreciation: building... credit = $150, under assets
The balance sheet valuation for an asset is the asset's cost basis minus accumulated depreciation. Similar bookkeeping transactions are used to record amortization and depletion.
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