Accumulated depreciation reports the amount of depreciation that has been recorded from the time an asset was acquired until the
date of the balance sheet. An asset's accumulated depreciation is subtracted from the asset's cost to indicate the asset's book value. The book value indicates the maximum amount of future depreciation remaining. Since depreciation is defined as the allocation of an asset's cost based on the
estimated useful life, the book value of the asset is not an indication of the asset's market value. For example, a building in an excellent location may be increasing in value even though the accumulated depreciation is increasing and therefore the book value is decreasing. The amount reported in Accumulated Depreciation merely reports the total amount of an asset's cost that has been moved to the income statement in the form of
depreciation expense since the asset was acquired. Definition of Accumulated DepreciationAccumulated Depreciation is a general ledger contra asset account associated with a company's property, plant and equipment. The credit balance in this account gets to be a larger credit balance whenever depreciation expense is recorded. When an asset is disposed of (sold, retired, scrapped) the credit balance in Accumulated Depreciation is reduced when the asset's credit balance is removed by debiting Accumulated Depreciation. [When an asset is sold, the depreciation expense must be recorded up to the date of the sale. Next, the asset's cost and its accumulated depreciation are removed from the accounts. Any money received is debited to Cash and any gain or loss on the sale is also recorded.] Example of a Reduction in Accumulated DepreciationAssume that a company has lots of equipment with a total cost of $600,000 that is reported in the asset account Equipment. The company's total amount of accumulated depreciation is $380,000 which appears as a credit balance in the contra asset account Accumulated Depreciation. Now assume that the company sells one piece of equipment that had a cost of $50,000 and had accumulated depreciation of $40,000 at the end of the previous accounting year. The first step is to record this year's depreciation for the equipment being sold. Let's assume the depreciation from the end of the previous accounting year until the date of the sale is $500. Therefore, the credit balance for this one piece of equipment at the time of the sale is $40,500. If the company receives $5,000 when disposing of the equipment, the journal entry to record the sale is:
Below is a summary of how the balance in Accumulated Depreciation had changed from the disposal of the asset:
Total depreciation over an asset's life What is Accumulated Depreciation?Accumulated depreciation is the total amount of depreciation expense allocated to a specific asset since the asset was put into use. It is a contra-asset account – a negative asset account that offsets the balance in the asset account it is normally associated with. Unlike a normal asset account, a credit to a contra-asset account increases its value while a debit decreases its value. Whenever depreciation expense is recorded for an organization, the same amount is also credited to the accumulated depreciation account, allowing the company to show both the cost of the asset and total-to-date depreciation of the asset. This also shows the asset’s net book value on the balance sheet. Financial analysts will create a depreciation schedule when performing financial modeling to track the total depreciation over an asset’s life. Video Explanation of Accumulated DepreciationWatch this short video to quickly understand the main concepts covered in this guide, including what accumulated depreciation is and how depreciation expenses are calculated. ExampleXYZ Company purchased equipment on January 1, 2015 for $100,000. The equipment has a residual value of $20,000 and has an expected useful life of 8 years. On December 31, 2017, what is the balance of the accumulated depreciation account? ($100,000 – $20,000) / 8 = $10,000 in depreciation expense per year  Download the Free TemplateEnter your name and email in the form below and download the free template now! Debiting Accumulated DepreciationWe credit the accumulated depreciation account because, as time passes, the company records the depreciation expense that is accumulated in the contra-asset account. However, there are situations when the accumulated depreciation account is debited or eliminated. For example, let’s say an asset has been used for 5 years and has an accumulated depreciation of $100,000 in total. After the 5-year period, if the company were to sell the asset, the account would need to be zeroed out because the asset is not relevant to the company anymore. Therefore, there would be a credit to the asset account, a debit to the accumulated depreciation account, and a gain or loss depending on the fair value of the asset and the amount received. Accumulated Amortization/DepletionAccumulated amortization and accumulated depletion work in the same way as accumulated depreciation; they are all contra-asset accounts. The naming convention is just different depending on the nature of the asset. For tangible assets such as property or plant and equipment, it is referred to as depreciation. For intangible assets such as patents, licenses, or trademarks, it is referred to as amortization, and for natural resources-related assets such as mines or oil platforms, depletion is the official terminology. When amortization or depletion expense is recorded for the year, the corresponding accumulated contra-asset accounts are credited in order to account for the expense. Related ReadingsThank you for reading CFI’s guide to Accumulated Depreciation. CFI offers a wealth of free resources on financial analysis and accounting, including the following:
What does less accumulated depreciation mean?Accumulated depreciation refers to the life-to-date depreciation that has been recognized that reduces the book value of an asset. On the other hand, accelerated depreciation refers to a method of depreciation where a higher amount of depreciation is recognized earlier in an asset's life.
How do you calculate Less accumulated depreciation on a balance sheet?Subtract the asset's salvage value from its total cost to determine what is left to be depreciated. Divide this value by the number of years of the asset's lifespan. Divide this figure by 12 to learn the monthly depreciation.
Is less accumulated depreciation an asset?Is Accumulated Depreciation an Asset or Liability? Accumulated depreciation is recorded in a contra asset account, meaning it has a credit balance, which reduces the gross amount of the fixed asset. As a result, it is not recorded as an asset or a liability.
What is accumulated depreciation on balance sheet?Accumulated depreciation is the running total of depreciation that has been expensed against the value of an asset. Fixed assets are recorded as a debit on the balance sheet while accumulated depreciation is recorded as a credit–offsetting the asset.
|
What is less accumulated depreciation on a balance sheet
Copyright © 2024 en.idkuu.com Inc.
