What is Accumulated Depreciation?
The accumulated depreciation of an asset is the amount of cumulative depreciation that has been charged on the asset since 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 value 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 at the end of 1st year and 3rd year.
Since the equipment will be used by the company 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 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 principles 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 statement 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 day 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 asset. As such, it can also help an accountant to track how much useful life is remaining for an asset.
This has been a guide to Accumulated Depreciation and its definition. Here we discuss the formula to calculate Accumulated Depreciation along with practical excel examples and downloadable excel templates. You may learn more about Accounting from the following articles –