Definition
Accumulated depreciation is the contra account created in the accounting record to offset the use/depreciation of assets. We do not directly reduce the cost of the assets to charge depreciation. So, we create an offset/contra account to reflect depreciation. With time, as the business keeps charging depreciation on the debit of an income statement, the credit keeps accumulating on the credit side. This credit side is referred to as accumulated depreciation.
Further, it’s important to note that the total balance of the accumulated depreciation cannot exceed the total amount for the cost of assets.
Detailed understanding for accumulated depreciation
As soon as the asset is brought in the useable condition, the business starts to depreciate with the useful life. Suppose the business purchases an asset amounting to $100,000 with a useful life of 10 years. If the business adopts the straight-line method of accounting, the depreciation to be charged will be $10,000 (100,000/10) per annum. The schedule for the depreciation can be shown as below,
| Year | Cost (A) | Depreciation per annum | Accumulated depreciation (B) | Net book value (A-B) |
| 1 | 100,000 | 10,000 | 10,000 | 90,000 |
| 2 | 100,000 | 10,000 | 20,000 | 80,000 |
| 3 | 100,000 | 10,000 | 30,000 | 70,000 |
| 4 | 100,000 | 10,000 | 40,000 | 60,000 |
| 5 | 100,000 | 10,000 | 50,000 | 50,000 |
| 6 | 100,000 | 10,000 | 60,000 | 40,000 |
| 7 | 100,000 | 10,000 | 70,000 | 30,000 |
| 8 | 100,000 | 10,000 | 80,000 | 20,000 |
| 9 | 100,000 | 10,000 | 90,000 | 10,000 |
| 10 | 100,000 | 10,000 | 100,000 | — |
The method of crediting accumulated depreciation remains the same irrespective of the method of depreciation adopted. However, in the straight-line method, an equal amount is credited in the accumulated depreciation. On the other hand, the reducing balance method has a different pattern of the credit – higher in the initial years of the asset purchase.
Examples
Suppose XYZ Company recorded a vehicle purchase of $40,000. The life of an asset is five years, without salvage value, following schedule can be generated,
| Year | Cost (A) | Depreciation per annum | Accumulated depreciation (B) | Net-book value (A-B) |
| 1 | 40,000 | 8,000 | 8,000 | 32,000 |
| 2 | 40,000 | 8,000 | 16,000 | 24,000 |
| 3 | 40,000 | 8,000 | 24,000 | 16,000 |
| 4 | 40,000 | 8,000 | 32,000 | 8,000 |
| 5 | 40,000 | 8,000 | 40,000 | ——— |
Let’s do year-wise journal entries to show how the accumulated depreciation account is updated.
Year-1
| Particulars | Debit | Credit |
| Depreciation A/C (Income statement) | 8,000 | |
| Accumulated depreciation (Balance sheet) | 8,000 |
Financial statement extract for the first year,
| Cost | 40,000 |
| Accumulated deprecation | (8,000) |
| Netbook value | 32,000 |
Year-2
| Particulars | Debit | Credit |
| Depreciation A/C (Income statement) | 8,000 | |
| Accumulated depreciation (Balance sheet) | 8,000 |
Financial statement extract for the second year,
| Cost | 40,000 |
| Accumulated deprecation | (16,000) |
| Netbook value | 24,000 |
Year-3
| Particulars | Debit | Credit |
| Depreciation A/C (Income statement) | 8,000 | |
| Accumulated depreciation (Balance sheet) | 8,000 |
Financial statement extract for the third year,
| Cost | 40,000 |
| Accumulated deprecation | (24,000) |
| Netbook value | 16,000 |
Year-4
| Particulars | Debit | Credit |
| Depreciation A/C (Income statement) | 8,000 | |
| Accumulated depreciation (Balance sheet) | 8,000 |
Financial statement extract for the fourth year,
| Cost | 40,000 |
| Accumulated deprecation | (32,000) |
| Netbook value | 8,000 |
Year-5
| Particulars | Debit | Credit |
| Depreciation A/C (Income statement) | 8,000 | |
| AD (Balance sheet) | 8,000 |
Financial statement extract for the fifth year,
| Cost | 40,000 |
| Accumulated deprecation | (40,000) |
| Netbook value | Nil |
It’s important to note that all the cost of an asset has been transferred to the accumulated depreciation. Even if an asset is used more, no depreciation will be charged as all the cost has been transferred to accumulated depreciation via income statement.
Conclusion
Accumulated depreciation is a contra account that is created in line with depreciation charged in the income statement. The reason for charging an accumulated depreciation account is that we do not reduce the cost account balance for control purposes. Further, there is no impact on the accumulated depreciation of adopting the method of depreciation.
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