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What is Accumulated Depreciation Formula?
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.
The calculation of accumulated depreciation is done by adding the depreciation expense charged during the current period to the accumulated depreciation at the beginning of the period while deducting the depreciation expense for a disposed asset.
Accumulated depreciation formula is represented as,
Explanation of the Accumulated Depreciation Formula
The accumulated depreciation formula can be calculated by using the following steps:
Step 1: Firstly, the accumulated depreciation equation at the start of the period is noted from the accounts department.
Step 2: Next, the depreciation expense charged for the current year is determined based on the existing assets and the applicable depreciation method such as straight line, written down value etc.
Step 3: In some cases, a company might dispose of some of its assets as part of its corporate strategy. In those cases, the adjustment to be done in the accumulated depreciation is determined from the accounts department.
Step 4: Finally, the calculation of accumulated depreciation at the end of the period is done by adding the accumulated depreciation at the start of the period to the depreciation expense during the year and deducting the accumulated depreciation on assets disposed of as shown below.
Accumulated depreciation formula is represented as,
Accumulated depreciation formula = Accumulated depreciation at the start of the period + Depreciation expense for the period – Accumulated depreciation on assets disposed off
Examples of Accumulated Depreciation Formula (with Excel Template)
Let’s see some simple to advanced examples to understand the calculation of the accumulated depreciation formula better.
Accumulated Depreciation Formula – Example #1
Let us consider the example of company A that bought a piece of equipment which 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 of Accumulated depreciation after 1st year will be –
Accumulated depreciation formula after 1st year = Accumulated depreciation at the start of year 1 + Depreciation during year 1
= 0 + $20,000
Accumulated depreciation after 1st year = $20,000
Therefore, the calculation of Accumulated depreciation after 2nd year will be –
Accumulated depreciation formula after 2nd year = Accumulated depreciation at the start of year 2 + Depreciation during year 2
= $20,000 + $20,000
Accumulated depreciation after 2nd year = $40,000
Therefore, the calculation of Accumulated depreciation after 3rd year will be –
Accumulated depreciation formula after 3rd year = Accumulated depreciation at the start of year 3 + Depreciation during year 3
= $40,000 + $20,000
Accumulated depreciation after 3rd year = $60,000
Therefore, the accumulated depreciation after the end of 1st year and 3rd year will be $20,000 and $60,000 respectively.
Accumulated Depreciation Formula – Example #2
Let us compute 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
- Accumulated depreciation as on January 1, 2018: $250,000
- Equipment worth $400,000 with accumulated depreciation of $100,000 has been disposed off 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 = Accumulated depreciation as on January 1, 2018 + Depreciation during a year – Accumulated depreciation for asset disposed off
Accumulated depreciation as on December 31, 2018= $250,000 + $200,000 – $100,000
= $350,000
Therefore, the accumulated depreciation on December 31, 2018 will be $350,000.
Relevance and Use of Accumulated Depreciation Formula
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, accumulated depreciation 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, accumulated depreciation can also help an accountant to track how much useful life is remaining for an asset.
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