Vehicle Depreciation Methods

by Marquis Codjia; Updated September 26, 2017
Depreciating a vehicle means spreading its cost over many years.

Depreciating a vehicle means allocating its cost over many years. A long-term asset, such as an automobile, is a resource that you own and will operate for more than a year. In contrast, a short-term asset is a resource that you most likely will sell or use in operating activities in the next 12 months.

Straight-Line

The Internal Revenue Service (IRS) allows you to depreciate over five years a vehicle that you own. You may use a straight-line method to depreciate the vehicle. In a straight-line depreciation procedure, you record the same depreciation amount every year. For example, you buy on credit a new vehicle valued at $25,000 and intend to use in shipping and receiving activities. To record the purchase in accounting ledgers, debit the property, plant and equipment account for $25,000 and credit the vendor payables account for the same amount. The annual tax and financial depreciation amount is $5,000 ($25,000 divided by five). To record the vehicle depreciation expense, credit the accumulated depreciation account for $5,000 and debit the depreciation expense account for the same amount. At the end of the first year, the vehicle's book value is $20,000 ($25,000 minus $5,000).

MACRS

The Modified Asset Cost Recovery System (MACRS) is an allocation procedure in which you record high depreciation amounts in earlier years. Depreciating a vehicle through MACRS may be financially advantageous if you want to lower fiscal liabilities in earlier years. For instance, you purchase a new truck valued at $50,000 and issue a check for the same amount. To record the purchase, debit the property, plant and equipment account for $50,000 and credit the cash account for the same amount. The accounting concept of credit is distinct from the banking term. In accounting parlance, crediting an asset account, such as cash, means reducing the account balance. You decide to depreciate the truck using a "50-30-20" MACRS depreciation method. The depreciation amount for the first year is $25,000 ($50,000 times 50 percent). To record the transaction, debit the depreciation expense account for $25,000 and credit the accumulated depreciation account for the same amount.

Other Considerations

Depreciation a vehicle is economically beneficial because you do not pay for depreciation expense, yet it lowers your fiscal debt. Vehicle depreciation accounting entries affect two financial statements. Depreciation expense is an income statement item. An income statement is also referred to as a statement of profit and loss or statement of income. Accumulated depreciation and property, plant and equipment accounts are balance sheet components. A balance sheet is otherwise known as a statement of financial position or statement of financial condition.

About the Author

Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.

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