Accumulated Depreciation on Your Business Balance Sheet

Most businesses have assets (things of value) and the value of these assets changes over time.
These changes affect the value of your business and your business taxes.

How Depreciation Works

The change in the value of business assets is depreciation. This term means two things:

1. A way to spread the cost of a business asset over its useful life, and
2. The gradual loss in the value of an asset. 1

The value of business assets is shown on your business balance sheet, a financial report that
shows assets on one side, with liabilities (amounts owed by the business) and the business
owner's equity (the difference between assets and liabilities, or the amount the owner owns) on
the other side. Like this:

Simple Business Balance Sheet

Assets   Liabilities  
   Total Assets$100,000    Total Liabilities $50,000
    Owner's Equity  
        Total Owner's Equity $50,000
Total Assets $100,000Total Liabilities and Owner's Equity$100,000

Accumulated Depreciation on Long-Term Assets

Some assets are short-term, used up within a year (like office supplies). Long-term assets are
used over several years, so the cost is spread out over those years. Short-term assets are put
on your business balance sheet, but they aren't depreciated.

Long-term assets are depreciated. Examples are buildings, machinery, equipment, furniture and
fixtures, and vehicles. The IRS calls these capital assets: tangible and generally illiquid (not
easily turned into cash) property used by a business to generate profit. The usefulness of capital
assets is expected to be greater than a year.2  3

Accumulated depreciation is the total decrease in the value of an asset on the balance
sheet of a business, over time. The cost for each year you own the asset becomes a business
expense for that year. This expense is tax-deductible, so it reduces your business taxable
income for the year.4

Two more terms that relate to long-term assets:

Residual value. Most capital assets (except land) have a residual value, sometimes called
"scrap value" or "salvage value." This value is what the asset is worth at the end of its useful life
and what it could be sold for. 5
Book value. The value of the asset on your business balance sheet at any one time is called
its book value - the original cost minus accumulated depreciation. Book value may (but not
necessarily) be related to the price of the asset if you sell it, depending on whether the asset
has residual value.6

DEPRECIATION IS A TAX TERM.You must calculate depreciation on capital assets every

year, so you can include this depreciation cost on your business tax return.

ACCUMULATED DEPRECIATIONis an accounting term. You take the depreciation for all
capital assets for the current year and add to the accumulated depreciation on those assets for
previous years to get the current year's accumulated depreciation on your business balance
sheet.

Business Assets on a Balance Sheet

Look at the balance sheet of a business and at the assets on the left side. We'll focus on the
long-term assets:

Land and Buildings are listed first. Land is never depreciated. Since land and buildings are
bought together, you must separate the cost of the land and the cost of the building to figure
depreciation on the building. 7

All of the specific items being depreciated in the other categories – furniture and fixtures,
leasehold improvements, and vehicles – have their own account, which shows the initial cost of
the item and the amount of depreciation taken each year, with the total amount of depreciation
shown as accumulated depreciation.

Depreciation Expense and Accumulated Depreciation

Let's say you have a car used in your business that has a value of $25,000. It depreciates over
10 years, so you can take $2,500 in depreciation expense each year. 

This depreciation expense is taken along with other expenses on the business profit and loss
report. As the asset ages, accumulated depreciation increases and the book value of the car
decreases.

Accumulated Depreciation on a Balance Sheet

The values of all assets of each type are considered together on the balance sheet, rather than
showing the value of individual assets. That car is in there somewhere.  

Here's the tricky part. The car doesn't really decrease in value - until it's sold. So the asset
shows up in two different accounts: (1) the asset's depreciated cost, and (2) accumulated
depreciation. The total of the two is the original value (cost) of the asset. The difference
between the two is the book value of that asset.  8

An Example of Accumulated Depreciation on a Balance Sheet

On the balance sheet of the company on December 31, 2019:

 Cost of Equipment $239,000

 Less Accumulated Depreciation $100,000
 Book Value of Equipment $139,000.

Accumulated Depreciation and Your Business Taxes 

You won't see "Accumulated Depreciation" on a business tax form, but depreciation itself is
included, as noted above, as an expense on the business profit and loss report. The good news
is that depreciation is a "non-cash" expense. You can count it as an expense to reduce the
income tax your business must pay, but you didn't have to spend any money to get this
deduction.

What shows up on your business tax form is the amount of depreciation expense that was taken
for the year, including all types of depreciation on all business property. For example, on
a Schedule C for a sole proprietor business, Line 13 under Expenses says, "Depreciation and
Section 179 deductions...." That's where you will see the total of all depreciation taken during
the year.

You must complete IRS Form 4562 Depreciation and Amortization for property in some
circumstances:

 If you are taking a Section 179 deduction for the current year or a Section 179 carryover
deduction from a prior year
 If you placed the property in service (bought and started using it) during the current year
 If you are claiming depreciation expense on a vehicle or on listed property, regardless of
when it was placed in service.9

Business vs. Personal Use. If you use an asset, like a car, for both business and personal
travel, you can't depreciate the entire value of the car, but only the percentage of use that's for
business. For example, if you use your car 60% of the time for business and 40% for personal,
you can only depreciate 60%. 1 0

You can also accelerate depreciation legally, getting more of a tax benefit in the first year you
own the property and put it into service (begin using it). The extra amounts of depreciation
include bonus depreciation and Section 179 deductions. These amounts change each year, so
check with your tax preparer.

Accumulated Depreciation and the Sale of a Business Asset

When you sell an asset, like the vehicle machine discussed above, the book value of the asset
and the accumulated depreciation for that asset are removed from the balance sheet. Since the
original cost of the asset is still shown on the balance sheet, it's easy to see what profit or loss
has been recognized from the sale of that asset. 1 1