In accounting, the basic adjusting entry for depreciation is the standard procedure used to record the "wear and tear" of a physical asset at the end of an accounting period.

It is called an "adjusting" entry because it doesn't happen when you spend cash; instead, it is a non-cash transaction Best Catering Services In Noida the closing process to ensure your financial statements accurately reflect the current value of your equipment and the true cost of doing business.

The Components of the Entry

The entry involves two specific accounts that always work together:

1. The Debit: Depreciation Expense

This represents the portion of the asset's cost that has been "used up" during the current month or year.

Location: Income Statement.

Purpose: To reduce your taxable profit by acknowledging the cost of using the asset.

2. The Credit: Accumulated Depreciation

This is a contra-asset account, meaning it is an asset account with a "negative" or credit balance.

Location: Balance Sheet (directly underneath the asset).

Purpose: To keep track of the total depreciation taken over the entire life of the asset without changing the record of what you originally paid for it.

A Simple Walkthrough

Imagine your company buys a high-end 3D Printer for $12,000. You expect it to last for 5 years (60 months) and believe it will have no value left at the end.

The Calculation: $12,000 \div 60 \ months = 200 \ per month.

The Adjusting Entry: At the end of every month, your accountant will make this entry:

Why is this entry necessary?

This entry is the heart of the Matching Principle. If you didn't make this adjustment:

Your Assets would be overstated: Your Balance Sheet would show a $12,000 printer even if it’s old and broken.

Your Profits would be overstated: You would be ignoring the "hidden cost" of your equipment wearing out, making your business look more profitable than it actually is.

Note: This entry is only for tangible assets like machinery, vehicles, and buildings. It is never used for land (which doesn't wear out) or intangible assets like patents (which use an "Amortization" entry instead).