Create depreciation accounts
Depreciation is the process of expensing a portion of the original cost of an asset each year. When you purchase a fixed asset (property used in a productive capacity which will benefit the enterprise for longer than one year), you should assign the entire depreciable value to a fixed asset account. Thereafter, you must make periodic adjustments to decrease the book value (basis less accumulated depreciation) of the asset and increase depreciation expense. Here's how it works.
1) Keep track of the total amount you have depreciated since you began. This amount is called accumulated depreciation.
2) Keep both the asset's original cost and its accumulated depreciation on your books so that your financial statements reflect the current book value of your assets.
For each asset or group of assets, you will need two Fixed Asset accounts - one to track cost, and one to track accumulated depreciation. These are typically subaccounts of an account that describes the asset or asset group. For example:
You don't need to make adjustments to the Computers or Vehicles accounts. The figures in these accounts will change as depreciation is accumulated. These accounts represent the book value of your assets.
Bear in mind that book value is not the same as market value. You may be able to sell the asset for more or less than the amount that appears on your books. You adjust for this difference at the time of sale.
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