Monthly Depreciation

If you are not posting monthly depreciation journal entries, your Profit & Loss and Balance Sheet reports are not accurate. This is a critical issue for small and medium-sized business owners who rely on precise financial statements to make informed decisions. The accounting principle called the matching principle requires that every expense must be recorded in the same period as the income it helped generate. When you buy a fixed asset, such as machinery or equipment, its cost should not be expensed all at once. Instead, the expense should be spread over the asset’s useful life through depreciation.

Relying only on year-end adjusting entries from your accountant can cause problems. Accountants sometimes accelerate depreciation to maximize tax savings early, which may not reflect the actual loss in value of your fixed assets. Posting monthly depreciation entries keeps your bookkeeping accurate and your financial reports reliable throughout the year.

Why Monthly Depreciation Matters

Depreciation is the process of allocating the cost of a fixed asset over its useful life. This allocation matches the expense with the revenue generated by the asset. Without monthly depreciation:

• Your Profit & Loss report will show an inaccurate net income.

• Your Balance Sheet will overstate the value of your fixed assets.

• Decision-making based on your financial reports will be flawed.

  
  

For example, imagine you purchase a delivery van for $36,000 with a useful life of 7 years. If you expense the entire $36,000 immediately, your Profit & Loss statement will show a huge loss in the first month, and your Balance Sheet will show no asset value afterward. Instead, spreading the cost over 7 years means you record $429 in depreciation expenses each month and gradually reduce the asset’s book value on the Balance Sheet. This approach reflects the van’s ongoing contribution to your business.

How to Post Monthly Depreciation

Posting monthly depreciation journal entries is straightforward once you understand the process. Here’s a simple step-by-step guide:

1. Determine the asset cost

   Include purchase price, taxes, and any costs needed to prepare the asset for use.

   
   

2. Estimate the useful life

   This is how long you expect to use the asset, usually measured in years or months.

   
   

3. Choose a depreciation method

   The most common method is straight-line depreciation, which spreads the cost evenly over the asset’s life.

   
   

4. Calculate monthly depreciation expense

   For straight-line, divide the asset cost by the number of months in its useful life.

   
   

5. Record the journal entry

   Debit depreciation expense and credit accumulated depreciation each month.

Avoiding Reporting Issues

Many business owners wait until the end of the year to adjust depreciation. This practice can cause issues:

• Financial reports during the year are inaccurate, affecting budgeting and forecasting.

• Accelerated depreciation methods used by accountants may not reflect actual asset usage, distorting your financial picture.

  
  

Posting monthly depreciation entries keeps your bookkeeping up to date and your financial statements consistent.

Practical Tips for Small and Medium Businesses

• Keep detailed records of asset purchases, improvements, and disposals.

• Use an accounting software like Quickbooks Online that supports automatic monthly depreciation journal entries.

• Train your bookkeeping staff or outsource to professionals who understand depreciation.

  
  

By integrating monthly depreciation into your routine bookkeeping, you maintain accurate Profit & Loss and Balance Sheet reports that truly reflect your business’s financial health.