What is the definition of accumulated depreciation? It’s basically the total amount of the depreciation expenditure allocated to a particular asset since that asset was used. It’s referred to as a contra asset account meaning its natural balance is a credit that reduces the overall asset value.
See how to calculate accumulated depreciation here…
Depreciation is a way for businesses to list the value of an asset as an expense on the balance sheet. Any costs associated with using the asset are also listed, and the final figure shows the total amount that the asset has depreciated up to a fixed point.
Accumulation depreciation is an asset and assets that have accumulated depreciation include:
- Office equipment
When the asset reaches the end of its lifespan the carrying value will match its salvage value.
Accumulated depreciation formula
A simple formula for how to work out accumulated depreciation is:
Total depreciation = Starting Cost – Salvage Value
To record depreciation using this method you simply debit the depreciation expense and credit the accumulated depreciation value. Depreciation expenses appear on the income statement during the accounting year, whilst the depreciation you accumulate is recorded on the balance sheet under related capital assets, with an increasing balance as deprecation expenses are added.
Accumulated depreciation calculator
There are basically two methods used to calculate accumulated depreciation and these are known as straight-line and double-declining balance.
Annual depreciation = Purchase Price – Salvage Value / Years in Useful Life
With the straight-line method, use the following templates:
- Take away the assets salvage value from its total cost to find out what’s left to be depreciated.
- Divide this value by the number of years of the asset’s lifespan.
- Then divide this figure by 12 to calculate the monthly depreciation figure.
Purchase Price – Salvage value x 1 / Years in Useful Life X2
With this method, the majority of the asset’s depreciation is calculated as occurring earlier in its lifespan. This applies to assets like vehicles and electronic equipment. As this means faster depreciation the rate is doubled from one to two, resulting in changing amounts from year to year.
Whatever method you choose to calculate accumulated depreciation you’ll need some basic information to be able to apply the chosen formula. Make sure you know:
- The original cost of the asset
- The useful lifespan of the asset
- The salvage value of the asset
Bear in mind that:
- Depreciation is recorded to tie the cost of using a long-term asset with the benefit gained from this use over time
- Accumulated depreciation is recorded to a specific date and is shown on the balance sheet below the related capital asset line
- The carrying value is the asset’s cost minus accumulated depreciation
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