Accumulated Depreciation Meaning
The accumulated depreciation of an asset is the amount of cumulative depreciation that has been charged on the asset from the date of its purchase until the reporting date. It is a contra-account, which is the difference between the purchase price of the asset and its carrying value on the balance sheet and is easily available as a line item under the fixed asset section in the balance sheet.
Accumulated Depreciation Formula
The calculation is done by adding the depreciation expense charged during the current period to the depreciation at the beginning of the period while deducting the depreciation expense for a disposed asset.
Let’s see some simple to advanced examples to understand the calculation better.
Let us consider the example of company A that bought a piece of equipment that is worth $100,000 and has a useful life of 5 years. The equipment is not expected to have any salvage valueSalvage ValueSalvage value or scrap value is the estimated value of an asset after its useful life is over. For example, if a company's machinery has a 5-year life and is only valued $5000 at the end of that time, the salvage value is $5000. at the end of its useful life. The equipment is to be depreciated on a straight-line method. Determine the accumulated depreciation at the end of 1st year and 3rd year.
Below is data for calculation of the accumulated depreciation on the balance sheet at the end of 1st year and 3rd year.
Since the company will use the equipment for the next 5 years, the cost of the equipment can be spread across the next 5 years. The annual depreciation for the equipment as per the straight-line method can be calculated as,
Annual depreciation = $100,000 / 5 = $20,000 a year over the next 5 years.
Therefore, the calculation after 1st year will be –
Accumulated depreciation formula after 1st year = Acc depreciation at the start of year 1 + Depreciation during year 1
= 0 + $20,000
Therefore, after 2nd year it will be –
Accumulated depreciation formula after 2nd year = Acc depreciation at the start of year 2 + Depreciation during year 2
= $20,000 + $20,000
Therefore, after 3rd year it will be –
Accumulated depreciation formula after 3rd year = Acc depreciation at the start of year 3 + Depreciation during year 3
= $40,000 + $20,000
Let us calculate the accumulated depreciation on the balance sheet at the end of the financial year ended December 31, 2018, based on the following information:
- Gross Cost as on January 1, 2018: $1,000,000
- Acc depreciation as on January 1, 2018: $250,000
- Equipment worth $400,000 with acc depreciation of $100,000 has been disposed of on January 1, 2018
- The machinery is to be depreciated on the straight-line method over its useful life (5 years)
Below is the data for calculation of accumulated depreciation at the end of the financial year ended December 31, 2018
As per the question, Depreciation during a year will be calculated as,
Depreciation during a year = Gross cost / Useful life
= $1,000,000 / 5
Depreciation during a year= $200,000
Therefore, calculation of Accumulated depreciation as on December 31, 2018, will be,
Accumulated depreciation as on December 31, 2018, = Acc depreciation as on January 1, 2018, + Depreciation during a year – Acc depreciation for asset disposed of
Accumulated depreciation as on December 31, 2018= $250,000 + $200,000 – $100,000
Relevance and Use
From the point of view of accounting, accumulated depreciation is an important aspect as it is relevant for assets that are capitalized. Assets that are capitalized provide value not only for a year but for more than one year, and accounting principlesAccounting PrinciplesAccounting principles are the set guidelines and rules issued by accounting standards like GAAP and IFRS for the companies to follow while recording and presenting the financial information in the books of accounts. prescribe that expenses and the corresponding sales should be recognized in the same period according to the matching concept. To cater to this matching principle in case of capitalized assets, accountants across the world use the process called depreciation.
Depreciation expense is a portion of the total capitalized asset that is recognized in the income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements. from the year it is purchased, and for the rest of the useful life of the asset. Subsequently, it is the total amount of the asset that has been depreciated from the date of its purchase to the reporting date. The amount of accumulated depreciation for an asset increases over the lifetime of the asset, as depreciation expense continues to be charged against the asset, which eventually decreases the carrying value of the assetCarrying Value Of The AssetCarrying value is the book value of assets in a company's balance sheet, computed as the original cost less accumulated depreciation/impairments. It is calculated for intangible assets as the actual cost less amortization expense/impairments.. As such, it can also help an accountant to track how much useful life is remaining for an asset.
This article has been a guide to Accumulated Depreciation on the balance sheet and its meaning. Here we discuss its formula along with step by step calculations. You may learn more about Accounting from the following articles –