Plant assets represent long-term tangible property owned by the firm. Although it is often not visible, the usefulness of a plant asset declines. This loss of usefulness is known as depreciation, and it requires an adjusting entry periodically. The decline in value requires a debit to Depreciation Expense account, and a credit to Accumulated Depreciation (which is said to be a contra asset account). The difference between the balances of the asset and contra asset accounts is the book value of the asset. If the adjusting entry is not made, assets, owner's equity, and net income will be overstated, and expenses will be understated.
Example:
Purchased equipment for $36,000 that has an estimated life of 12 years with no residual value.
| Cost of equipment – Residual amount/ Life | = $36,000 – 0/ 12 years |
| = $ 3,000 depreciation expense per year | |
| Cost of equipment – Residual amount/ Life | = $36,000 – 0/ 144 months |
| = $ 250 depreciation expense per month |
| Adjusting journal entry: | Debit | Credit |
| Depreciation expense – Equipment | $ 250 | |
| Accumulated depreciation – Equipment | $ 250 |
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