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Accumulated Depreciation Explained

What is accumulated depreciation?

Accumulated depreciation is the total amount of depreciation expense that has been allocated to an asset since it was put in use.

For every asset you have in use, there is the “original basis” (how much it initially cost) and then there’s the “accumulated depreciation” (essentially, how much value it has lost, which is now considered an expense on your books).

When you record depreciation on a tangible asset, you debit depreciation expense and credit accumulated depreciation for the same amount. This shows the asset’s net book value on the balance sheet and allows you to see how much of an asset has been written off and get an idea of its remaining useful life.

How to find accumulated depreciation

To find accumulated depreciation, look at the company’s balance sheet. Accumulated depreciation should be shown just below the company’s fixed assets.

Some companies don’t list accumulated depreciation separately on the balance sheet. Instead, the balance sheet might say “Property, plant, and equipment – net,” and show the book value of the company’s assets, net of accumulated depreciation. In this case, you may be able to find more details about the book value of the company’s assets and accumulated depreciation in the financial statement disclosures.

Where does accumulated depreciation go on the balance sheet?

On most balance sheets, accumulated depreciation appears as a credit balance just under fixed assets. In some financial statements, the balance sheet may just show one line for accumulated depreciation on all assets.

To illustrate, here’s how the asset section of a balance sheet might look for the fictional company, Poochie’s Mobile Pet Grooming.

poochie-balance-sheet

Other times, accumulated depreciation may be shown separately for each class of assets, such as furniture, equipment, vehicles, and buildings.

For example, if Poochie’s wanted to see the accumulated depreciation by asset type, the fixed asset section of the balance sheet might look like this instead:

Fixed Assets
Equipment 2,000
Accumulated depreciation, equipment (1,000)
Van 60,000
Accumulated depreciation, van (12,000)
Total Fixed Assets 49,000

The accumulated depreciation number on the balance sheet is the cumulative total of all depreciation that has been taken as an expense on the income statement from the time the company acquired the asset until the date of the balance sheet.

Is accumulated depreciation an asset?

Accumulated depreciation is known as a “contra-asset account.” Contra asset accounts are negative asset accounts that offset the balance of the asset account they are normally associated with.

In a standard asset account, credits decrease the value while debits to the account increase its value. A Contra-asset works in the opposite direction: credits increase its value while debits decrease its value.

Accumulated depreciation is typically shown in the Fixed Assets or Property, Plant & Equipment section of the balance sheet, as it is a contra-asset account of the company’s fixed assets. Showing contra accounts such as accumulated depreciation on the balance sheets gives the users of financial statements more information about the company. For example, if Poochie’s just reported the net amount of its fixed assets ($49,000 as of December 31, 2019), the users would not know the asset’s cost or the amount of depreciation attributed to each class of asset.

By separately stating accumulated depreciation on the balance sheet, readers of the financial statement know what the asset originally cost and how much has been written off. It can also help them estimate the asset’s remaining useful life.

Accumulated depreciation is not a current asset, as current assets aren’t depreciated because they aren’t expected to last longer than one year.

How to calculate accumulated depreciation

Most businesses calculate depreciation and record monthly journal entries for depreciation and accumulated depreciation. The actual calculation depends on the depreciation method you use. Two of the most popular depreciation methods are straight-line and MACRS.

Straight-line depreciation

Using the straight-line method, you depreciation property at an equal amount over each year in the life of the asset.

For example, say Poochie’s Mobile Pet Grooming purchases a new mobile grooming van. The cost of the asset is $60,000. If the company depreciates the van over five years, Pocchie’s will record $12,000 of accumulated depreciation per year, or $1,000 per month.

Each month, the following transaction will be recorded in Poochie’s books:

Account Debit Credit
Depreciation Expense $1,000
Accumulated Depreciation $1,000

MACRS Depreciation

For tax purposes, the IRS requires businesses to depreciate most assets using the Modified Accelerated Cost Recovery System (MACRS).

Under MACRS, the IRS assigns a useful life to different types of assets. For example, office furniture is depreciated over seven years, automobiles get depreciated over five years, and commercial real estate is depreciated over 39 years. MACRS depreciation is an accelerated method of depreciation, because allows business to take a higher depreciation amount in the first year an asset is placed in service, and less depreciation each subsequent year.

To calculate depreciation using MACRS, you first determine the asset’s classification, i.e., three-year property, five-year property, etc. Then you use the tables found in IRS Publication 946 to calculate depreciation for that year.

For more information on other depreciation methods, including double-declining balance method, the sum-of-the-year’s digits method, and units of production depreciation, check out What Is Depreciation? And How Do You Calculate It?

Is accumulated depreciation a debit or credit?

No matter which method you use to calculate depreciation, the entry to record accumulated depreciation includes a debit to depreciation expense and a credit to accumulated depreciation.

However, when your company sells or retires an asset, you’ll debit the accumulated depreciation account to remove the accumulated depreciation for that asset.

Going back to the mobile grooming van example above, say Poochie’s uses the van for five years. At the end of that five years, the van has been fully depreciated, so it appears in the Fixed Asset section of the balance sheet like this:

Fixed Assets Balance as of December 31, 2024
Van 60,000
Accumulated depreciation, van (60,000)

Poochie’s decides it’s time to sell the old van and purchase a new one. When the van is sold, Poochie’s will need to credit the van’s asset account and debit the accumulated depreciation account to remove the original cost of the asset and its total depreciation from the books. The entry to remove the value of the asset would look like this:

Account Debit Credit
Accumulated Depreciation $60,000
Van $60,000

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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