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    What Is Accumulated Depreciation?: Contra Asset Account

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    Bella Ayab
    Accumulated depreciation is a contra asset account that reduces the reported value of fixed assets on the balance sheet over time. It increases as depreciation expenses are credited against assets each period. When assets are sold or retired, accumulated depreciation is removed from the balance sheet. Depreciation expenses allocated to each period are recorded on the income statement as a non-cash expense that reduces net income. Common depreciation methods include straight-line and declining-balance, and accumulated depreciation is used to calculate an asset's net book value.

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    What Is Accumulated Depreciation?: Contra Asset Account

    Uploaded by

    Bella Ayab
    58 views2 pages
    Accumulated depreciation is a contra asset account that reduces the reported value of fixed assets on the balance sheet over time. It increases as depreciation expenses are credited against assets each period. When assets are sold or retired, accumulated depreciation is removed from the balance sheet. Depreciation expenses allocated to each period are recorded on the income statement as a non-cash expense that reduces net income. Common depreciation methods include straight-line and declining-balance, and accumulated depreciation is used to calculate an asset's net book value.

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    Accumulated Depreciation

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    Accumulated depreciation is a contra asset account that reduces the reported value of fixed assets on the balance sheet over time. It increases as depreciation expenses are credited against assets each period. When assets are sold or retired, accumulated depreciation is removed from the balance sheet. Depreciation expenses allocated to each period are recorded on the income statement as a non-cash expense that reduces net income. Common depreciation methods include straight-line and declining-balance, and accumulated depreciation is used to calculate an asset's net book value.

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    58 views2 pages

    What Is Accumulated Depreciation?: Contra Asset Account

    Uploaded by

    Bella Ayab
    Accumulated depreciation is a contra asset account that reduces the reported value of fixed assets on the balance sheet over time. It increases as depreciation expenses are credited against assets each period. When assets are sold or retired, accumulated depreciation is removed from the balance sheet. Depreciation expenses allocated to each period are recorded on the income statement as a non-cash expense that reduces net income. Common depreciation methods include straight-line and declining-balance, and accumulated depreciation is used to calculate an asset's net book value.

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    What Is Accumulated Depreciation?

    The accumulated depreciation account is a contra asset account on a company's balance sheet,
    meaning it has a credit balance. It appears on the balance sheet as a reduction from the gross
    amount of fixed assets reported.

    The amount of accumulated depreciation for an asset or group of assets will increase over time as
    depreciation expenses continue to be credited against the assets. When an asset is eventually sold
    or put out of use, the accumulated depreciation associated with that asset will be reversed,
    eliminating all record of the asset from the company's balance sheet.

    What Are Depreciation Expenses?


    Depreciation expenses, on the other hand, are the allocated portion of the cost of a company's
    fixed assets that are appropriate for the period. Depreciation expense is recognized on the income
    statement as a non-cash expense that reduces the company's net income. For accounting
    purposes, the depreciation expense is debited, and the accumulated depreciation is credited.

    It is considered a non-cash expense because the recurring monthly depreciation entry does not
    involve a cash transaction. Because of this, the statement of cash flows prepared under
    the indirect method adds the depreciation expense back to calculate cash flow from operations.
    Typical depreciation methods can include straight line, double-declining balance, and units of
    production.

    Depreciation and Accumulated Depreciation Example


    The straight line method charges the same amount every year as depreciation, calculated as:

    \begin{aligned} &\text{SLD} = \dfrac{\text{Asset Cost} - \text{Salvage


    Value}}{\text{Useful Life}}\\ &\textbf{where:}\\ &\text{SLD = Straight Line
    Depreciation}\\ \end{aligned}SLD=Useful LifeAsset Cost−Salvage Value
    where:SLD = Straight Line Depreciation
    As an example, Company ABC bought a piece of equipment for $250,000 at the start of the year.
    The equipment's residual value is $25,000, with an expected useful life of 10 years. The yearly
    depreciation expense using straight-line depreciation would be $22,500 per year.

    Each year, $22,500 is added to the accumulated depreciation account. At the end of year five, the
    accumulated depreciation amount would equal $112,500, or $22,500 in yearly depreciation
    multiplied by five years.

    Accumulated Depreciation and Book Value


    Accumulated depreciation is used in calculating an asset’s net book value. This is the amount a
    company carries an asset on its balance sheet. Net book value is the cost of an asset subtracted by
    its accumulated depreciation. For example, a company purchased a piece of printing equipment
    for $100,000 and the accumulated depreciation is $35,000, then the net book value of the
    printing equipment is $65,000.
    Accumulated depreciation cannot exceed an asset’s cost. If an asset is sold or disposed of, the
    asset’s accumulated depreciation is removed from the balance sheet. Net book value, however,
    isn’t necessarily reflective of the market value of an asset.  

    Depreciation Method Examples


    Beyond the straight-line method, there's also the declining balance method. This is the only other
    depreciation method allowed by the Internal Revenue Service (IRS) for tax purposes. The
    declining balance method is calculated as:

    \begin{aligned} &\text{DBD = (NBV - SV)} \times \dfrac{1}{\text{UL}}


    \times \text{DR}\\ &\textbf{where:}\\ &\text{NBV = Net book value}\\
    &\text{SV = Salvage value}\\ &\text{UL = Useful life}\\ &\text{DR =
    Depreciation rate}\\ \end{aligned}DBD = (NBV - SV)×UL1
    ×DRwhere:NBV = Net book valueSV = Salvage valueUL = Useful life
    DR = Depreciation rate

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