How to Account For Accumulated Depreciation

Learn the basics of depreciation. Understanding accumulated depreciation is impossible without understanding depreciation. Depreciation is the reduction of the value of a fixed asset over a pre-defined period of time. For example, the value of a piece of machinery worth $10,000 at purchase may depreciate by $1,000 per year over a period of 10 years.^[1]

• What is a fixed asset? A fixed asset refers to a piece of property owned by a business that used in the production of income, and is not expected to be converted into cash for at least a year. This can include real estate, office equipment, machinery, vehicles, furniture, and much more.
• When depreciating an asset, you must know the cost of the asset (how much you paid), the useful life of the asset (how long it is expected to be productive), the salvage value (how much it is worth at the end of its life) and the depreciation method (the rate at which the asset is depreciated over its useful life).
• Depreciation reflects how the value of an asset is used up over time.

Account for depreciation. The purpose of depreciation is to match part of the expense of an asset to the income it produces. Because of this, you need to record the depreciation during each period as an expense on the income statement. For example, if your machine depreciates by $1,000 each year, this will be a $1,000 expense on the income statement annually.^[2]

• Having this $1,000 expense on the income statement allows you to match the cost of the asset with the revenues it produces.
• If you are accounting for the depreciation of an asset, record it as a debit to the Depreciation Expense account.

Learn what accumulated depreciation is. Accumulated depreciation is simply the total amount of an asset's cost that has been depreciated since the asset was purchased. In other words, it is the total amount of an asset's cost that has been charged as an expense since the asset was purchased.^[3]

• For example, for a $10,000 machine depreciating at $1,000 per year for 10 years, after year five, the accumulated depreciation would be $5,000, reflecting five years of charging $1,000 of the assets value to the depreciation account.
• If you take the original the cost of the asset (your purchase price), and subtract the accumulated depreciation, you get the "book value" or the "carrying value" of the asset.
• Accumulated depreciation is known as a "contra-asset". This means that accumulated depreciation is an asset account with a credit balance. In other words, while the price of a machine is listed as an asset, accumulated depreciation has a credit balance which increases over time, and therefore offsets the cost of the asset. It can almost be thought of as a "negative asset".

Discover what accumulated depreciation is not. It is important to remember that you cannot use accumulated depreciation to value an asset. In other words, if you purchased an asset for $10,000, and there has been accumulated depreciation of $6,000, it does not mean your asset is now worth $4,000. This is because the value of that that asset is determined by what the market is willing to pay for it (also known as the market value).

• In other words, the carrying value of an asset (cost minus accumulated depreciation), is not the value of the asset. The value of the asset is equal to what it would sell for on the open market.