Direct and indirect depreciation

Regardless of the depreciation method (straight-line or declining balance method; see blog entry Methods for Calculating the Depreciation Amount), the depreciation can be recorded either directly on the asset account or indirectly by creating an allowance for depreciation account.

Direct Method

The depreciation is recorded directly on the asset account (e.g., Machinery).

Journal entry: Depreciation (Expense account) / Machinery (Asset account)

‍The balance of the asset account shows the book value or the balance sheet value. The balance sheet only shows the book value of the assets and says nothing about their acquisition value.

Indirect Method

Depreciation is recorded indirectly in an accumulated depreciation account (contra asset account).

Journal entry: Depreciation / Accumulated Depreciation Machinery

‍The asset accounts always show the acquisition value. The balance sheet displays the acquisition value, the accumulated depreciation, and the book value of the assets.