Dictionary / Depreciation
What does Depreciation mean in accounting?
Quick definition
Accrual & timingWear and tear of a fixed asset which decreases its value. This term guides how bookkeepers record, classify, and explain related transactions in routine financial reporting.
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Examples
A delivery van you depreciate each close
You buy a $28,000 delivery van from a van dealer on March 12 for bakery deliveries and put it on the road April 1. You code the purchase to vehicles, not delivery expense. At each close you post depreciation expense and the matching accumulated depreciation from your van schedule. In QuickBooks Online this is a recurring journal entry on that asset; in Xero it is the depreciation run. Check the P&L for the monthly slice and the balance sheet for cost minus accumulated depreciation.
Selling a mixer before it is fully depreciated
You sell a used mixer in October for $1,200 after three years in the bakery. Your asset list still shows $6,800 cost and $4,100 of accumulated depreciation, so book value is $2,700. You remove the mixer and the contra-asset, record the $1,200 deposit, and the $1,500 difference is a loss. If you scrap it with no buyer, that leftover is a write-off. Stop the monthly depreciation entry the month it leaves, or the balance sheet still lists a mixer you sold.
Why it matters
A large asset purchase should not wipe out one month of profit. If you have equipment, vehicles, or furniture above your capitalization habit, post depreciation every month (or at least every year) after you place the asset in service, and keep going until it is fully depreciated or sold. Skip it and later years look too profitable while the balance sheet still shows the asset at full cost. The usual miss is coding the whole purchase to expense on the card, or posting depreciation without an asset list so accumulated depreciation drifts from the schedule.
Further reading
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What is Depreciation in bookkeeping?
Wear and tear of a fixed asset which decreases its value.
When should I use Depreciation?
Use Depreciation when the transaction facts match its definition and you need the ledger and financial statements to reflect the correct account and period.
What is a common mistake with Depreciation?
Depreciation is used for depreciation entries, while Daybook covers a related but distinct bookkeeping purpose. Review both terms before posting unusual transactions. A common mistake is applying it by label only instead of checking the underlying transaction details.