Accumulated Depreciation

What Is Accumulated Depreciation?

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 asset’s cost 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. 

Understanding Accumulated Depreciation

Depreciation is allocating a cost over several accounting periods (e.g., years) to its corresponding revenue. Under GAAP, depreciation must be matched with the same accounting period in which the expense is incurred (i.e., Trade Date or Delivery Date).

The matching principle dictates that businesses must match expenses with their revenues in the same financial year. Depreciation is a term used by accountants to describe the process of allocating fixed asset purchases, such as machinery and vehicles, over their usable life.

In accounting, accumulated depreciation is the total expenditure on an asset up until a particular date. It is found by adding all the accruable depreciation for all periods and subtracting any salvage value from the total. The carrying amount of an asset is the asset’s cost, including accumulated depreciation, less any estimated disposal costs. When an asset has been fully depreciated, its carrying value on the balance sheet equals its salvage value.

In accounting, accumulated depreciation is the total amount of depreciation for an asset as recorded in the asset’s general ledger account (primarily a fixed asset account). It represents all the amounts taken to record the total amount that an entity has depreciated a tangible long-term asset since it was purchased.

On the balance sheet, accumulated depreciation is listed to the right of the current assets section. This value adds up to the amounts recorded for depreciation expense over time.

Example of Accumulated Depreciation

  1. If you have ever purchased a car, you may be familiar with the concept of accumulated depreciation. This is when the value of a depreciated asset significantly exceeds the purchase price. When this happens, the bank will write off the balance higher than it would have been sold for on the open market. In some cases, this can be beneficial to you because the agency selling your asset may not be willing to offer you the highest price they are willing to pay for it. The car dealership may be willing to give you a better rate and lower fees than what is available on the open market because they are trying to profit.
  2. For example, let’s say you have a sign that costs $100, and you sold it for $120. If you kept the sign and put it on the street for $50, you would charge $2,000 in depreciation. But if you put it in a warehouse for one year and sell it for $3,000 at a profit, you only pay $1,000 in taxes because the federal government bans taxing depreciated property at a loss.
  3. Typical business owners have accumulated a great amount of depreciation in their business. This is the time when you pay for raw materials and earn money back when they are sold. For example, if your main office costs $100,000 and you sell it for $120,000 after expenses, that would be taxed at 45 percent. The other 55 percent would be your business’s return on equity, or what it would have been if you had just run the business with no debt and no depreciation at all.

Debiting Accumulated Depreciation

In accounting for depreciation, the accumulated depreciation account is debited. This account reflects the total of all the depreciation expenses that were to be incurred over the entire productive life of an asset. However, there are situations when this account is credited or eliminated. For example, say an asset was used for 10 years, and accumulated depreciation is $100,000 in total.

After 10 years, if the company were to sell the asset, there would be a gain/loss depending on the asset’s fair value and the amount received.

Accumulated Amortization / Depletion

Accumulated amortization/depletion is a contra-asset account with the same function as accumulated depreciation; however, the naming convention is different. Amortization refers to expenses related to acquiring or developing intangible assets, such as patents, licenses, or trademarks. Depletion refers to expenses related to natural resources.

When amortization or depletion is recorded for the year, a contra-asset account is credited to maintain the asset and expense balance.