When you purchase a capital asset (learn more about capital assets here), instead of recording all of the cost as an expense when you buy it, the expense of owning it is spread out over its expected useful life. This is called depreciation. Here’s how to enter it in Wave!
What is depreciation?
Most supplies that a business purchases to use in the course of operations are expenses, and directly deducted from the income earned in the same time period. Capital assets are different; they are recorded to an asset account on the balance sheet, and the cost of the asset is converted into expense over time as it is used. This is called depreciation.
For example, let’s say you buy a laptop for $2,000 when you start your own consulting business. You categorize that laptop to a Property, Plant, and Equipment asset account called “Laptop.” You expect to use it for 3 years before getting a new one. At the end of the first year of your business, you then expense ⅓ of the cost of the laptop, or $667, as depreciation, and on your balance sheet, the laptop value less the depreciation would be $2,000 - $667, or $1,333.
The calculation of depreciation can be complex, as the method and useful asset life are often determined by a regulatory entity, so we recommend consulting with an accountant.
How to set up accounts for recording depreciation
- Head to Accounting > Chart of Accounts > Add a new account (top right corner), and in the Depreciation & Amortization subcategory, click Add a new account.
- Name the account Accumulated Depreciation, or something similar.
- Click Save.
This account will be an offset to the value of the asset account. Wave automatically creates a Depreciation expense account, which you can see in your Chart of Accounts under Expenses. (If the account isn’t there, you can also add it yourself!)
How to record depreciation
- Head to Accounting > Transactions, and in the upper right corner of the page, select More > Add journal transaction.
- In the description, enter something like “Annual depreciation expense” and select the date (usually the end of a year, quarter, or month).
- Under the Debit column, make the Category Depreciation expense, and enter the amount.
- Under the Credit column, make the Category Accumulated depreciation, and enter the same amount as was entered in the debit column.
- Click Save.
You're all done! You've now recorded accumulated depreciation on your asset.