As we’ve touched on above, the accumulated depreciation account is called a long-term contra asset account. To record depreciation using this method, debit the depreciation expense and credit the accumulated depreciation value. Accumulated depreciation is the sum of the depreciation recorded on an asset since purchase. The accounting treatment for the disposal of a completely depreciated asset is a debit to the account for the accumulated depreciation and a credit for the asset account.
Accumulated depreciation is an asset under generally accepted accounting principles (GAAP) — a commonly followed collection of accounting guidelines that organizations use in reporting their financial numbers. If an asset is sold or reaches the end of its useful life, the total amount of depreciation that has accumulated in the contra-asset over time is reversed. Accumulated depreciation is not a current asset, as current assets aren’t depreciated because they aren’t expected to last longer than one year. Other times, accumulated depreciation may be shown separately for each class of assets, such as furniture, equipment, vehicles, and buildings. Accumulated depreciation is not an asset because balances stored in the account are not something that will produce economic value to the business over multiple reporting periods. Accumulated depreciation actually represents the amount of economic value that has been consumed in the past.
How Contra Asset Accounts Work
Accumulated depreciation as a contra asset account increases as long-term fixed assets depreciates in value. Companies, thereby, record the accumulated depreciation on their balance sheet which is likely to reduce the company’s gross fixed assets. The desk’s net book value is $8,000 ($15,000 purchase price – $7,000 contra asset accumulated depreciation). Accumulated depreciation is the total amount of depreciation of a company’s assets, while depreciation expense is the amount that has been depreciated for a single period. Depreciation is an accounting entry that represents the reduction of an asset’s cost over its useful life.
We credit the accumulated depreciation account because, as time passes, the company records the depreciation expense that is accumulated in the contra-asset account. Accumulated depreciation is calculated using several different accounting methods. Those accounting methods include the straight-line method, the declining balance method, the double-declining balance method, the units of production method, or the sum-of-the-years method. In general, accumulated depreciation is calculated by taking the depreciable base of an asset and dividing it by a suitable divisor such as years of use or units of production.
Overview: What is a contra asset account?
They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting. For instance, it is common to keep the purchase price of a piece of equipment as a historical cost in the debit asset account when it comes to fixed assets. Accumulated depreciation is listed on the asset side of a company’s balance sheet under the section for fixed assets, also known as non-current assets. But it is a “contra asset” – an asset account that offsets and reduces another asset account. Typically it offsets and reduces the value of a company’s property, plant, and equipment.
Depreciation expense is considered a non-cash expense because the recurring monthly depreciation entry does not involve a cash transaction. Because of this, the statement of cash flows prepared under the indirect method adds the depreciation expense back to calculate cash flow from operations. The methods used to calculate depreciation include straight line, declining balance, sum-of-the-years’ digits, and units of production. Since accelerated depreciation is an accounting method for recognizing depreciation, the result of accelerated depreciation is to book accumulated depreciation.
Declining balance (DB) depreciation
Each period, the depreciation expense recorded in that period is added to the beginning accumulated depreciation balance. An asset’s carrying value on the balance sheet is the difference between its historical cost and accumulated depreciation. At the end of an asset’s useful life, its carrying value on the balance sheet will match its salvage value. The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method. The use of Allowance for Doubtful Accounts allows us to see in Accounts Receivable the total amount that the company has a right to collect from its credit customers.
Under this method, the amount of accumulated depreciation accumulates faster during the early years of an asset’s life and accumulates slower later. The philosophy behind accelerated depreciation is assets that are newer (i.e. a new company vehicle) are often used more than older assets because they are in better condition and more efficient. Under the declining balance method, depreciation is recorded as a percentage of the asset’s current book value. Even though accumulated depreciation will still increase, the amount of accumulated depreciation will decrease each year. Accumulated depreciation is the cumulative depreciation of an asset up to a single point in its life.
Hence, on the balance sheet, the accumulated depreciation is reported as a contra asset that reduces the net book value of the capital asset section. Your accounting software stores your accumulated depreciation balance, carrying it until you sell or otherwise get rid of the asset. Each year, check to make sure the account balance accurately reflects the amount you’ve depreciated from your fixed assets. Accumulated depreciation is recorded as a contra asset via the credit portion of a journal entry.
- Accumulated depreciation is recorded as a contra asset via the credit portion of a journal entry.
- Using the straight-line method, accumulated depreciation of $2,000 is recognized.
- Depreciation expense is recorded on the income statement as an expense and represents how much of an asset’s value has been used up for that year.
- They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting.
- Divided over 20 years, the company would recognized $20,000 of accumulated depreciation every year.
It helps companies avoid major losses in the year it purchases the fixed assets by spreading the cost over several years. Accumulated depreciation is the total amount of depreciation expense recorded for an asset on a company’s balance sheet. The accumulated depreciation account is a contra asset account on a company’s balance sheet. Accumulated depreciation specifies the total amount of an asset’s wear to date in the asset’s useful life.