Accumulated Depreciation

What Is Accumulated Depreciation?

Accumulated depreciation is the cumulative depreciation of an asset up a single degree in its life. Accumulated depreciation is a contra asset account, significance its natural balance is a credit that decreases the overall asset value.

Figuring out Accumulated Depreciation

The matching principle under generally accepted accounting principles (GAAP) directs that expenses must be matched to a similar accounting period wherein the connected revenue is produced. Through depreciation, a business will expense a portion of a capital asset's value over every extended period of its helpful life. This means that every year a capitalized asset is put to utilize and produces revenue, the cost associated with spending the asset is recorded.

Accumulated depreciation is the total amount an asset has been deteriorated up until a single point. Every period, the depreciation expense kept in that period is added to the beginning accumulated depreciation balance. An asset's carrying value on the balance sheet is the difference between its historical cost and accumulated depreciation. Toward the finish of an asset's useful life, its carrying value on the balance sheet will match its salvage value.

While recording depreciation in the general ledger, a company debits depreciation expense and credits accumulated depreciation. Depreciation expense flows through to the income statement in the period it is recorded. Accumulated depreciation is introduced on the balance sheet below the line for related capitalized assets. The accumulated depreciation balance increments after some time, adding the amount of depreciation expense kept in the current period.

Illustration of Accumulated Depreciation

Straight-line depreciation expense is calculated by finding the depreciable base of the asset, which equals the difference between the historical cost of the asset and its salvage value. The depreciable base is then separated by the asset's valuable life to get the periodic depreciation expense. In this model, the historical cost of the asset is the purchase price, the salvage value is the value of the asset toward the finish of its helpful life, likewise alluded to as scrap value, and the helpful life is the number of years the asset is expected to offer some benefit.

Company A purchases a piece of equipment with a helpful life of 10 years for $110,000. The equipment is estimated to have a salvage value of $10,000. The equipment will furnish the company with value for the next 10 years, so the company expenses the cost of the equipment over the course of the next 10 years. Straight-line depreciation is calculated as (($110,000 - $10,000)/10), or $10,000 per year. This means the company will devalue $10,000 for the next 10 years until the book value of the asset is $10,000.

Every year the contra asset account alluded to as accumulated depreciation increments by $10,000. For instance, toward the finish of five years, the annual depreciation expense is still $10,000, yet accumulated depreciation has developed to $50,000. That is, accumulated depreciation is a cumulative account. It is credited every year as the value of the asset is written off and stays on the books, decreasing the net value of the asset, until the asset is discarded or sold. It is important to note that accumulated depreciation can't be more than the asset's historical cost even assuming the asset is still being used after its estimated helpful life.

Features

Accumulated depreciation is the sum of all recorded depreciation on an asset to a specific date.
Depreciation is recorded to tie the cost of utilizing a long-term capital asset with the benefit acquired from its utilization over the long run.
Accumulated depreciation is introduced on the balance sheet just below the connected capital asset line.
The carrying value of an asset is its historical cost minus accumulated depreciation.