How to Show Depreciation on a Balance Sheet

Showing depreciation correctly on your balance sheet isn't just about following the rules; it's about telling an accurate story of your company's long-term assets. This core accounting practice reflects how an asset's value is used over time, providing a clear picture of its remaining worth to stakeholders. This guide will walk you through exactly how to record the necessary journal entry and present depreciation properly under the Property, Plant, and Equipment section of your balance sheet.

Understanding Depreciation and Its Key Accounts

Before creating the journal entry or formatting the balance sheet, you need a firm grasp of two key concepts: depreciation expense and accumulated depreciation. People often confuse the two, but they play very different roles and appear on different financial statements.

Depreciation Expense is the portion of an asset's cost that is allocated to a single accounting period. Think of it as the amount of the asset's value "used up" during the year. Because it’s an expense, it is reported on the income statement and reduces the company's net income for that period.

Accumulated Depreciation is the total sum of all depreciation expenses recorded for a specific asset since it was first put into use. It's a cumulative account, meaning it grows each year as you record more depreciation. This is a balance sheet account, but it’s a special type called a contra-asset account. Its purpose is to decrease the book value of a related asset without directly taking the asset's historical cost off the books. Maintaining the historical cost is important for transparency, as it shows investors what you originally paid for your assets.

The relationship between these two accounts and the asset's original cost gives us the asset's book value (also known as net book value or carrying value).

The formula is simple:

Historical Asset Cost - Accumulated Depreciation = Book Value

This book value is the number that represents the asset's worth on your balance sheet at a specific point in time.

The Journal Entry for Recording Depreciation

To get depreciation onto the balance sheet, you first need to record it with a journal entry. This entry is typically made as part of the adjusting entries at the end of an accounting period (like a month, quarter, or year). The double-entry transaction always follows the same format: you increase an expense and increase a contra-asset.

• Debit: Depreciation Expense
• Credit: Accumulated Depreciation

The debit to Depreciation Expense increases expenses on the income statement, which lowers your taxable income. The credit to Accumulated Depreciation increases the contra-asset account, which lowers the book value of your fixed assets on the balance sheet.

An Example in Action

Let’s say your construction company purchases a new backhoe for $100,000. You determine its useful life is 10 years and it will have no salvage value at the end of that period. Using the simple straight-line depreciation method, the annual depreciation expense is calculated as:

($100,000 Cost - $0 Salvage Value) / 10 Years = $10,000 per year

At the end of the first year, your accountant would make the following adjusting journal entry:

Date: December 31, 2023

Accounts:

• Depreciation Expense       $10,000 (Debit)
• Accumulated Depreciation - Equipment       $10,000 (Credit)

(To record annual depreciation on the backhoe)

After this entry, your 2023 income statement would show a $10,000 depreciation expense, and your balance sheet would now have a $10,000 balance in the Accumulated Depreciation account specifically linked to that equipment.

How to Present Depreciation on the Balance Sheet

Once the journal entry is posted, the next step is reflecting it accurately on the balance sheet. Depreciation information is contained within the non-current assets section, under the subheading Property, Plant, and Equipment (PP&E).

The standard and most transparent method is to show three lines for your assets or asset classes:

1. The historical cost of the asset.
2. The accumulated depreciation to date.
3. The resulting net book value.

Using our backhoe example, here’s how the PP&E section of the balance sheet would look after one year:

Property, Plant, and Equipment:

• Equipment (at cost)                             $100,000
• - Less: Accumulated Depreciation     ($10,000)
• Equipment, Net                                $90,000

This layout is preferred by lenders, investors, and auditors because it clearly shows the original investment in the asset and its age or how much its cost has been allocated to expense. Now, let's see how this changes in the second year. At the end of Year 2, you would record another $10,000 of depreciation expense. The Accumulated Depreciation account balance now becomes:

$10,000 (Year 1) + $10,000 (Year 2) = $20,000

The balance sheet at the end of Year 2 would be updated as follows:

Property, Plant, and Equipment:

• Equipment (at cost)                             $100,000
• - Less: Accumulated Depreciation     ($20,000)
• Equipment, Net                                $80,000

This process continues each year until the book value of the asset is reduced to its salvage value (or zero, if it has no salvage value).

Different Depreciation Methods Change the Presentation Timing

While the journal entry and balance sheet presentation remain the same, the depreciation method you choose will affect the amounts recorded each year. This means the book value of your asset will decrease at different speeds depending on the method.

• Straight-Line Method: As shown above, this method spreads the cost evenly over the asset’s useful life. It creates a predictable, steady decline in book value.
• Double-Declining Balance: This is an accelerated method that records more depreciation in the earlier years of an asset's life and less in the later years. Using this method, the book value on the balance sheet would decrease much faster in Years 1 and 2 compared to the straight-line method.
• Units-of-Production: This method links depreciation expense to actual asset usage. For example, a machine might be depreciated based on the number of units it produces. The depreciation expense, and thus the reduction in book value, will fluctuate each year with production levels.

Consult with a tax professional to determine the best method for both financial reporting ("book" purposes) and tax purposes, as the rules (like MACRS for taxes) can be quite different.

Using Accounting Software for Depreciation

Manually tracking depreciation for a company with hundreds of assets is impossibly tedious and prone to error. This is where accounting software with a fixed asset management module becomes invaluable.

Systems like QuickBooks Online Advanced or Xero allow you to create a fixed asset register. For each asset, you can input:

• Asset name and description
• Purchase date and cost
• Asset class (e.g., machinery, vehicles, furniture)
• Useful life and salvage value
• Depreciation method

Once set up, the software can automatically calculate the monthly or annual depreciation for all assets and propose the combined journal entry. You simply review and post it. This automation ensures accuracy, consistency, and a clear audit trail, taking the manual labor out of a critical accounting function.

Final Thoughts

Properly presenting depreciation on a balance sheet comes down to a consistent process: calculating the periodic expense, recording the correct debit and credit, and displaying the asset's cost against its accumulated depreciation. This transparent method gives readers of your financial statements powerful insight into the age, value, and efficiency of your long-term assets.

While accounting software handles the bookkeeping, the strategic decisions around depreciation—like choosing the correct MACRS class for tax purposes or understanding state-specific adjustments—can create significant complexity. For these moments when you need instant, citation-backed answers about federal or state tax law concerning fixed assets, we built Feather AI. It helps ensure your depreciation strategy is not only GAAP-compliant for your books but also optimized for your tax returns.