Accumulated depreciation is the total depreciation for a fixed asset that has been charged to expense since that asset was acquired and made available for use. The accumulated depreciation account is an asset account with a credit balance (also known as a contra asset account); this means that 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 will increase over time, as depreciation continues to be charged against the asset. The original cost of the asset is known as its gross cost, while the original cost of the asset, less the amount of accumulated depreciation and any impairment, is known as its net cost or carrying amount.
The balance in the accumulated depreciation account will increase more quickly if a business uses an accelerated depreciation methodology, since doing so charges more of an asset's cost to expense during the earlier years of usage.
When the asset is eventually retired or sold, the amount in the accumulated depreciation account relating to that asset is reversed, as is the original cost of the asset, thereby eliminating all record of the asset from the company's balance sheet. If this derecognition were not completed, a company would gradually build up a large amount of gross fixed asset cost and accumulated depreciation on its balance sheet.
Calculating accumulated depreciation is a simple matter of running the depreciation calculation for a fixed asset from its acquisition date to its disposition date. However, it is useful to spot-check the calculation of the depreciation amounts that were recorded in the general ledger over the life of the asset, to ensure that the same calculations were used to record the underlying depreciation transaction.
For example, ABC International buys a machine for $100,000, which it records in the Machinery fixed asset account. ABC estimates that the machine has a useful life of 10 years and will have no salvage value, so it charges $10,000 to depreciation expense per year for 10 years. The annual entry, showing the credit to the accumulated depreciation account, is:
After 10 years, ABC retires the machine, and records the following entry to purge both the asset and its associated accumulated depreciation from its accounting records:
|Assets - Machinery||100,000|