Accumulated Depreciation

(noun)

Accumulated depreciation is known as a contra account, because it separately shows a negative amount that is directly associated with another account.

Examples of Accumulated Depreciation in the following topics:

  • Adjustments

    • Depreciation @ $20/monthAccumulated Depreciation 20, Depreciation Expense 20; Assets(-)=Equity(-)Augusta.
    • Depreciation @ $20/monthAccumulated Depreciation 20, Depreciation Expense 20; Assets(-)=Equity(-)c.
    • Depreciation on studio equipment (500 for 25 months = 20/month)Depreciation expense 20 Accumulated Depreciation 20Augusta.
    • Depreciation on studio equipment (500 for 25 months = 20/month)Depreciation expense 20 Accumulated Depreciation 20c.
    • Depreciation on studio equipment (500 for 25 months = 20/month)

  • Sale

    • When the sale takes places, a journal entry is recorded that (1) updates depreciation expense, (2) removes the asset and its accumulated depreciation account off the balance sheet, (3) increases cash or other asset with the amount of proceeds received, and (4) records a gain or loss on the sale.
    • A journal entry is recorded to increase (debit) depreciation expense and increase (credit) accumulated depreciation.
    • Depreciation expense is reported on the income statement as a reduction to income.
    • The increase in the accumulated depreciation account reduces the asset to its current book value .
    • The entry to remove the asset and its contra account off the balance sheet involves decreasing (crediting) the asset's account by its cost and decreasing (crediting) the accumulated depreciation account by its account balance.

  • What Is Depreciation?

    • Depreciation expense affects the values of businesses and entities because the accumulated depreciation disclosed for each asset will reduce its book value on the balance sheet.
    • Depreciation expense also affects net income.
    • Depreciation expense can be calculated using a variety of methods.
    • The expense is recognized and reported when the asset is placed into use and is calculated for each accounting period and reported under Accumulated Depreciation on the balance sheet and Depreciation Expense on the income statement.
    • A depreciation method commonly used to calculate depreciation expense is the straight line method.

  • Methods of Depreciation

    • Straight-line depreciation has been the most widely used depreciation method in the U.S. for many years due to its simplicity.
    • The journal entry for this transaction is a debit to Depreciation Expense for USD 1,000 and a credit to Accumulated Depreciation for USD 1,000.
    • The depreciation expense is reported on the income statement as a reduction to revenues and accumulated depreciation is reported as a contra account to its related Delivery Truck asset account (reduces the asset's cost to its book value).
    • This amount is disclosed on the income statement and is part of the asset's accumulated depreciation on the balance sheet.
    • Apply the rate to the book value of the asset (cost subtracted by accumulated depreciation) and ignore salvage value.

  • Impact of Depreciation Method

    • The journal entry for this transaction is a debit to Depreciation Expense for 1,000 and a credit to Accumulated Depreciation for 1,000.
    • The depreciation expense is reported on the income statement as a reduction to revenues and accumulated depreciation is reported as a contra account to its related Delivery Truck asset account (reduces the asset's cost to its book value).
    • This amount is disclosed on the income statement and is part of the asset's accumulated depreciation on the balance sheet.
    • Next, apply the resulting double-declining rate to the declining book value of the asset (cost subtracted by accumulated depreciation).
    • The depreciation method used to depreciate a car calculates an expense that reduces income.

  • Factors for Calculating Depreciation

    • The journal entry for this transaction is a debit to Depreciation Expense for $1,000 and a credit to Accumulated Depreciation for $1,000.
    • The depreciation expense is reported on the income statement as a reduction to revenues and accumulated depreciation is reported as a contra account to its related Delivery Truck asset account (reduces the asset's cost to its book value) on the balance sheet.
    • First, calculate the depreciation per unit:
    • This amount is disclosed on the income statement and is part of the asset's accumulated depreciation on the balance sheet.
    • Next, apply the resulting double-declining rate to the declining book value of the asset (cost subtracted by accumulated depreciation).

  • Cost of Buildings

    • Unlike land, buildings are subject to depreciation or the periodic reduction of value in the asset that is expensed on the income statement and reduces income.
    • Since buildings are subject to depreciation, their cost is adjusted by accumulated depreciation to arrive at their net carrying value on the balance sheet.
    • For example, on Acme Company's balance sheet, their office building is reported at a cost of $150,000, with accumulated depreciation of $40,000.

  • Reporting Assets

    • Finally a business must choose a depreciation method.
    • Instead, it will record a negative asset balance called accumulated depreciation.
    • By adding the accumulated depreciation with the asset's value, a person reading the balance sheet will be able to determine the asset's current value.
    • In this case, the value of the asset account is not adjusted but its accumulated depreciation account is decreased.
    • Then the business must write off the asset balance as well as its accumulated depreciation balance.

  • Valuing Repairs, Maintenance, and Additions

    • However, since there is no visible, tangible addition to, or improvement in, the quality of services, they charge the expenditures to the accumulated depreciation account, thus reducing the credit balance in that account.
    • Such expenditures cancel a part of the existing accumulated depreciation; firms often call them extraordinary repairs.
    • This asset had been depreciated using the straight-line method for one year and had a book value of USD 30,000 (USD 40,000 cost—USD 10,000 first-year depreciation) at the beginning of 2010.
    • The charge for depreciation should have remained at USD 10,000 for each of the next three years.
    • With the incorrect entry, however, depreciation increases.

  • Cost of Equipment

    • Equipment is subject to depreciation.
    • Depreciation is a periodic reduction in an asset's value.
    • The cost is then reduced by accumulated depreciation to arrive at a net carrying value or net book value.
    • A company is free to decide what depreciation method to use on the equipment.