Accumulated Depreciation is referred to as the total amount a company depreciates its assets with. On the other hand, depreciation is referred to as the amount with which the company’s assets are depreciated in a given period. Essentially, accumulated depreciation is referred to as the total amount of a company’s cost that has been allocated to the depreciation expense.
Accumulated Depreciation Definition
The accumulated depreciation expense is referred to as a contra asset account that is maintained on the Balance Sheet of the company. Since it is a contra-asset account, it has a credit balance. It appears on the Balance Sheet as a charge from the gross amounts of the Fixed Assets that have been reported.
Accumulated Depreciation on the Balance Sheet increases with every subsequent year, since the depreciation expense is a constant expense across the useful life of the asset. However, this does not imply that the Accumulated Depreciation changes uniformly across different years. The change in Accumulated Depreciation is contingent on the depreciation format that is used by the company.
Once the asset is sold or no longer used by the business, the accumulated depreciation that is reversed, and hence all the record of the fixed asset is removed from the Balance Sheet of company.
What are Depreciation Expenses?
Depreciation Expenses are referred to as the allocated portion of the cost of the company’s fixed assets that are relevant to the existing period. Depreciation expense is mostly recognized on the income statement as a non-cash expense that reduces the net income of the company. For accounting and bookkeeping purposes, the depreciation expense is debited, and the accumulated depreciation is duly credited.
Depreciation is considered a non-cash expense since the recurring expense incurred as a result of depreciation does not involve any cash related transaction. Because of this particular transaction, the statement of cash flows that is prepared in accordance with the Indirect Method simply adds back the depreciation expense in order to evaluate the cash flow from operations. The most common depreciation methods include Straight-Line Method, Double-Declining Method, and Unites of Production.
Is Accumulated Depreciation an expense?
Given that Accumulated Depreciation and Depreciation are different terminologies, it is important to note that they also hold different accounting nature. Factually, it can be seen that Accumulated Depreciation is NOT considered to be an expense. In fact, it is simply considered to be a contra-asset account that reduces the carrying value of assets every subsequent year.
Onthe contrary, it can be seen that Depreciation in itself is an expense. This is because this is a chargeback that is charged to the Profit and Loss Account every subsequent year. In simple words, Depreciation is an expense, whereas Accumulated Depreciation is not an expense.
However, it is also important to note that the figure of Accumulated Depreciation on the Balance Sheet is representative of the depreciation expense that has already been charged to the Profit and Loss Account of the company.
How to Calculate Accumulated Depreciation?
In order to examine how to calculate Accumulated Depreciation, it is important to note the methodology to calculated Depreciation.
The most common method to calculate deprecation is used the Straight Line Method. Straight Line Method is calculated using the following formula:
Straight Line Method = (Cost of the Asset – Salvage Value) / Useful Life of the Asset
After Depreciation has been calculated for every year using the Straight Line Method, the amount is then charged to the Profit and Loss Account for the expense of the current year. The amount is also added to the Accumulated Depreciation expense as a contra asset account for the respective year.
If the company using the Double Declining Method (or Reducing Balance Method), the formula used to calculate the depreciation is different. When using Reducing Balance Method, Depreciation Expense for the current year is calculated as follows:
Depreciation using Double Declining Method = (Carrying Value of the asset) * Depreciation Rate
Likewise, once depreciation for the current year is calculated, it is then added back to the Accumulated Depreciation in order to figure out the carrying value of the asset.
Normally, assets that are evenly used across their useful life are depreciated using the Straight Line Method. On the contrary, assets that are used more in the initial years, and lesser in the alter years are depreciated using the Reducing Balance Method.
Example of Accumulated Depreciation
The concept of Accumulated Depreciation is illustrated in the following example:
Harry Co. purchased equipment worth $20,000 on 1st January 2010. They decided to depreciate the equipment using Straight Line Method. The asset had zero salvage value, and had an expected life of 10 years. The asset was sold at a price of $10,000 on 31st December 2015.
In the example above, it can be seen that Harry Co. uses Straight Line Method to depreciate all the assets. Depreciation charge per year is calculated as follows:
Depreciation Charge = (Cost of the Asset – Salvage Value) / Useful Life
Depreciation Charge = $20,000 / 10 = $2000
This implies that depreciation expense per year is $2000 for Harry Co.
At the end of 2010 (i.e. 31st December 2010), the carrying value of the asset would be as follows:
Net Book Value = Cost of Asset – Accumulated Depreciation
Net Book Value = $20,000 – $2,000 = $18,000
Similarly, at the end of 2011 (i.e. 31st December 2011), the carrying value of the asset would be as follows:
Net Book Value = Cost of Asset – Accumulated Depreciation
Net Book Value = $20,000 – $4,000 = $16,000
Below is the table illustrating the calculation of accumulated depreciation if the asset is continued to use until at the end of its usual life:
| Year | Depreciation | Accumulated Depreciation | Net Book Value |
| Jan 2010 | – | – | 20,000 |
| 2010 | 2,000 | 2,000 | 18,000 |
| 2011 | 2,000 | 4,000 | 16,000 |
| 2012 | 2,000 | 6,000 | 14,000 |
| 2013 | 2,000 | 8,000 | 12,000 |
| 2014 | 2,000 | 10,000 | 10,000 |
| 2015 | 2,000 | 12,000 | 8,000 |
| 2016 | 2,000 | 14,000 | 6,000 |
| 2017 | 2,000 | 16,000 | 4,000 |
| 2018 | 2,000 | 18,000 | 2,000 |
| 2019 | 2,000 | 20,000 | – |
Therefore, it can be seen that Accumulated Depreciation increases with the change in the depreciation charge for every subsequent year.
Similarly, at the end of 2015 (i.e. 31st December 2015), the carrying value of the asset would be as follows:
Net Book Value = Cost of Asset – Accumulated Depreciation
Net Book Value = $20,000 – $12,000 = $8,000
The asset was sold at a price of $10,000. This implies that Harry Co. made a profit of $2,000 on the sale of the asset.
This profit would be recorded as Other Income on the Profit and Loss Account of the company.
