Loading the player...

What is 'Accumulated Depreciation'

Accumulated depreciation is the cumulative depreciation of an asset up to a single point in its life. An asset's carrying value on the balance sheet is the difference between its purchase price and accumulated depreciation. A company buys and holds an asset on the balance sheet until the salvage value matches the carrying value.

BREAKING DOWN 'Accumulated Depreciation'

There are two types of assets: Those that are expensed in the year of purchase, and those that are capitalized. Assets that are used within a year of being purchased, like inventory, are considered operating assets. These assets are generally sold or used in the year of purchase, and so they are fully expensed in the year of purchase. Capitalized assets provide value for more than one year, and accountants like to match expenses to sales in the period in which they are incurred. As a solution to this matching problem, accountants use a process called depreciation. Depreciation expenses a portion of the cost of the asset in the year it is purchased and the rest as the asset is used in future years. Accumulated depreciation is the total amount that the asset has been expensed over the asset's life.

Accumulated Depreciation Example

Straight-line depreciation expense is calculated by dividing the difference between the cost of the asset and its salvage value by the asset's useful life. In this example, the cost of the asset is the purchase price; the salvage value is the value of the asset at the end of its life, also referred to as scrap value; and the useful life is the number of years the asset is expected to provide value.

Company A buys a piece of equipment with a useful life of 10 years for $110,000. The equipment has a salvage value of $10,000 at the end of its useful life. The equipment is going to provide the company with value for the next 10 years, so analysts expense the cost of the equipment over the next 10 years. Straight-line depreciation is calculated as $110,000 minus $10,000 divided by 10, or $10,000. This means the company will depreciate $10,000 for the next 10 years until the book value of the asset is $10,000.

Each year the contra asset account referred to as accumulated depreciation increases by $10,000. For example, at the end of five years the annual depreciation expense is still $10,000, but accumulated depreciation has grown to $50,000. That is, accumulated depreciation is a cumulative account. It is credited each year as the value of the asset is written off and remains on the books until the asset is sold. It is important to note that accumulated depreciation can't be more than the asset's cost even if the asset is used after its useful life.

RELATED TERMS
  1. Fully Depreciated Asset

    A fully depreciated asset is a property, plant or piece of equipment ...
  2. Depreciated Cost

    Depreciated cost is the original cost of a fixed asset less accumulated ...
  3. Salvage Value

    The estimated value that an asset will realize upon its sale ...
  4. Depreciation

    1. A method of allocating the cost of a tangible asset over its ...
  5. Declining Balance Method

    A common depreciation-calculation system that involves applying ...
  6. Straight Line Basis

    A method of computing amortization (depreciation) by dividing ...
Related Articles
  1. Investing

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  2. Taxes

    Recoverable Depreciation: How it Works

    Recoverable depreciation is a concept used in many insurance policies and claims.
  3. Financial Advisor

    How Does Depreciation Reduce My Tax Bill?

    How the depreciation tax rule can assist real estate investors.
  4. Investing

    How Depreciation Works on a Rental Property

    One of the advantages of owning rental real estate is the depreciation tax deduction.
  5. Trading

    Top Economic Factors That Depreciate The $US

    A variety of factors contribute to currency depreciation, including monetary policy, inflation, demand for currency, economic growth and export prices.
  6. Personal Finance

    Cars That Depreciate The Least

    Here are some of the top vehicles to buy if you're looking to keep the residual value of the vehicle high after a number of years.
  7. Personal Finance

    Understanding The Difference Between Spending And Investing

    Learn more about the difference between investment and spending, and why it is an important distinction to make.
  8. Managing Wealth

    Asset Manager Ethics: Valuation Is A Tricky Business

    Asset managers must accurately represent all of a clients assets in the client portfolio. This can be tricky for unique and hard-to-value assets.
RELATED FAQS
  1. What is the tax impact of calculating depreciation?

    Understand the tax implications of a company's depreciation. Learn how differences in accounting methods change the amount ... Read Answer >>
  2. What is the difference between carrying value and market value?

    Understand the difference between carrying value and market value. Learn when a company uses carrying value to value an asset ... Read Answer >>
  3. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow Read Answer >>
  4. Can real estate be depreciated?

    Decrease the amount of taxable income on your income-producing real estate by depreciating the asset on your federal income ... Read Answer >>
Hot Definitions
  1. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  2. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  3. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  4. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  5. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  6. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
Trading Center