Depreciation - Balance sheet only or can I use Profit and Loss?

by Mary Peters

Question regarding depreciation.

I need some advice regarding Fund Accounting.

I use a software package that allows me to depreciate my fixed assets, but to do so I have to include in the transaction the use of a Profit and Loss GL account.

My Chart of Account Structure is set up that all my accounts are of the type Balance Sheet. Is it OK for me to use a Profit and Loss account when I am Fund Accounting?

Kind regards


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by: Vickey

Depreciation can be very confusing. Your accounting software is going to include the use of a Profit and Loss (Income Statement) account because depreciation is considered a noncash expense which goes on the income statement.

However, let me insert a quick lesson on fund accounting. Fund accounting is simply a system of accounting based on separating information into groups which reflect donor-imposed restrictions.

So just like “for-profit” accounting, you are going to have both Profit and Loss accounts (income and expense) and Balance Sheet accounts (assets and liabilities) in your Chart of Accounts.

Okay back to your question…

First of all, determine if your church even needs to track depreciation. See this post on Whether a church needs to depreciate fixed assets?

If you determine you need to track depreciation, then...

If you don't already have one, you will need to set up a depreciation expense account.

Okay, this is where it gets a little confusing...depreciation also gets recorded on a balance sheet account.

It is called Accumulated Depreciation. It is a contra asset account. The use of this account allows an asset account such as Equipment to continue to report the equipment's cost while also reporting in the account Accumulated Depreciation the amount that has been charged to depreciation expense since the asset was acquired.

For example: say you spend $5000 for a new piece of equipment. You expect this equipment to last 5 years. Using the straight-line depreciation method, your accounting journal would look like this:

When you first make your purchase:

DR. Equipment $5000

CR. Cash $5000

Then each year, you would make the following journal entry to record the depreciation expense for the equipment:

DR. Depreciation Expense $1000

CR. Accumulated Depreciation $1000

I know you have software that automatically does this for you, but sometimes it helps to know the basic accounting concepts behind its actions.

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