Definition | Explanation | Examples | Journal Entry | Financial Statements
Emilie N.- FCCA, CB, MBS
Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from corporates, financial services firms - and fast growing start-ups.
What is Accumulated Depreciation?
Accumulated depreciation is a contra asset account with a credit balance that records the cumulative reduction in the value of capital assets incurred to date due to age and use in order to offset the gross amount of fixed assets and report their book value on a balance sheet.
- Capital Asset accounts hold the original acquisition cost of long-term fixed assets like buildings, equipment and vehicles.
- Accumulated Depreciation contra accounts contain the sum total of the cumulative depreciation expenses that have been charged against a company’s non-current assets over time to reduce their value due to passage of time and use.
- In combination, the asset and contra-asset accounts show the net current value (also known as book value or carrying amount) of fixed assets on a company’s balance sheet (= original cost – depreciation).
Why is Accumulated Depreciation used?
Accumulated Depreciation asset contra accounts are reported separately on a balance sheet to provide the users of financial statements with a better insight into a company’s financials than if the assets were reported solely at their net amounts by making it clear what proportion of assets was depreciated compared to their remaining useful life and value.
Accounting for Accumulated Depreciation
Debit or Credit?
Accumulated Depreciation is a contra asset account that normally has a credit balance and is credited when increased, which is the exact opposite of its parent Asset account that normally has a debit balance and is debited when increased.
Fixed Assets | Asset | Increase | Decrease |
Accumulated Depreciation | Contra-Asset | Decrease | Increase |
Allowance for Doubtful Accounts - Provision for Bad Debts | Accounts Receivable |
Discount on Notes Receivable | Notes Receivable |
Reserve for Obsolete, Unsold and Unusable Inventory | Inventory |
Accumulated Depreciation | Property, Plant and Equipment - Long-Term Fixed Assets |
Journal Entry
A depreciation journal entry records the current depreciation amount as a debit to a Depreciation expense account and a credit to an Accumulated Depreciation contra-asset account.
Depreciation | Expense | $$$ | |
Accumulated Depreciation | Contra-Asset | $$$ |
What is the difference between Accumulated Depreciation vs. Depreciation Expense?
Depreciation Expense is an expense account with a debit balance that records the amount of depreciation for one single accounting period, whereas Accumulated Depreciation is a contra asset account with a credit balance that carries the total cumulative amount of asset depreciation charged to date.
Depreciation Expense | Expense | Debit | Income Statement | Amount of depreciation charged for one accounting period |
Accumulated Depreciation | Contra-Asset | Credit | Balance Sheet | Total cumulative amount of depreciation charged to date |
Financial Statements
The Depreciation expense is presented on an income statement as an operating expense and the Accumulated Depreciation contra asset account is captured on a balance sheet under capital assets, as a deduction from Property, Plant and Equipment non-current fixed assets.
Depreciation Expense | Income Statement | Expenses | Operating Expenses |
Accumulated Depreciation | Balance Sheet | Assets | Long-term Assets (Non-current Fixed Assets) >> PP&E (Property, Plant and Equipment) |
Disposal
If an asset is sold or reaches the end of its useful life, the total amount of depreciation that has accumulated in the contra-asset over time is reversed.
Accumulated Depreciation | Contra-Asset | $$$ | |
Fixed Asset | Asset | $$$ |
Practical Example
Accumulated Depreciation in General Ledger and Financial Statements
QuestionAt the beginning of the year, Company A purchases a new van for $20,000. Company A estimates that the vehicle’s useful life is 10 years with no residual value.
At the end of the year, Company A uses the straight-line method to calculate the depreciation for the van, arriving at an annual expense of $2,000 ($20,000 purchase price / 10 years of useful life).
1. What will Company A’s depreciation journal entries look like in Year 1 and Year 10?
2. How will the depreciation be reflected in the company’s financial statements in Year 1?
AnswerIn the general ledger, Company A will record the depreciation amount for the current year as a debit to a Depreciation expense account and a credit to an Accumulated Depreciation contra-asset account.
The accumulated depreciation of the van will increase by $2,000 for each year of its useful life.
Depreciation Expense | Expense | $2,000 | |
Accumulated Depreciation | Contra-Asset | $2,000 |
On the balance sheet, Company A’s accumulated depreciation will increase by $2,000 every year to reduce the net current book value of its long-term assets, which is calculated as the total accumulated depreciation value for the time period subtracted from the initial purchase price (historical cost of acquisition).
Consequently, the net value of the van will amount to 0 at the end of its useful life in 10 years.
In Year 1, the van asset account will have a debit balance of $20,000 and the Accumulated Depreciation contra will show a credit balance of $2,000, resulting in the van’s book value (current value or carrying amount) of $18,000.
Non-Current Assets: Vehicles | Parent Asset | $20,000 |
(Less: Accumulated Depreciation) | Contra-Asset | ($2,000) |
Net Non-Current Assets | Current Book Value | $18,000 |
Emilie N., FCCA, CB, MBS
Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups.
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