Definition: Accumulated Depreciation is an accounting term used to calculate the amount of Depreciation an asset has experienced over its useful life. It is not the total cost of the asset, such as the purchase price or lease payments, but it is the cost of the asset to date.
Accumulated Depreciation is typically calculated for tangible property and is used to eliminate all intangibles in determining a gain or loss on an investment.
This includes all expenses to repair, maintain, and improve the assets (including wear and tear), all expenses for improvements or replacements made, and all expenses for acquiring the asset. This expense is accumulated because it accumulated over time like its capitalized nature – once used, it can no longer be used without incurring an expense.
The accumulated depreciation measure is a way of recognizing the wear-and-tear on an asset over its useful life. This recognition allows a company to calculate its profit more accurately, allowing it to amortize the wear-and-tear over time and recognize deductions over the asset’s useful life rather than paying them out-of-pocket the beginning of each period.
The asset’s useful life represents the period during which an asset is expected to be used and replaced. Therefore, an asset with little expected replacement value will have a low accumulated depreciation amount. However, an asset that is replaced after several years may have a higher accumulated depreciation amount subject to reclassification as obsolete when it loses any further economic value.
There are two approaches to identifying Accumulated Depreciation. You can either calculate it as the present value of past costs or use an estimated lifetime value when valuing future costs. Both are useful methods, but they have different limitations.
The accumulated depreciation is the amount of reduction in a gain or profit over time on an asset (e.g. a building). It is more commonly used in relation to buildings and machinery because it gives the investor a way to measure whether or not a property is actually going to increase in value over time.