What Is Accumulated Depreciation?

The accumulated depreciation account is a contra asset account on a company's balance sheet,
meaning it has a credit balance. It appears on the balance sheet as a reduction from the gross
amount of fixed assets reported.

The amount of accumulated depreciation for an asset or group of assets will increase over time as
depreciation expenses continue to be credited against the assets. When an asset is eventually sold
or put out of use, the accumulated depreciation associated with that asset will be reversed,
eliminating all record of the asset from the company's balance sheet.

What Are Depreciation Expenses?

Depreciation expenses, on the other hand, are the allocated portion of the cost of a company's
fixed assets that are appropriate for the period. Depreciation expense is recognized on the income
statement as a non-cash expense that reduces the company's net income. For accounting
purposes, the depreciation expense is debited, and the accumulated depreciation is credited.

It 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.
Typical depreciation methods can include straight line, double-declining balance, and units of
production.

Depreciation and Accumulated Depreciation Example

The straight line method charges the same amount every year as depreciation, calculated as:

\begin{aligned} &\text{SLD} = \dfrac{\text{Asset Cost} - \text{Salvage

Value}}{\text{Useful Life}}\\ &\textbf{where:}\\ &\text{SLD = Straight Line
Depreciation}\\ \end{aligned}SLD=Useful LifeAsset Cost−Salvage Value
where:SLD = Straight Line Depreciation
As an example, Company ABC bought a piece of equipment for $250,000 at the start of the year.
The equipment's residual value is $25,000, with an expected useful life of 10 years. The yearly
depreciation expense using straight-line depreciation would be $22,500 per year.

Each year, $22,500 is added to the accumulated depreciation account. At the end of year five, the
accumulated depreciation amount would equal $112,500, or $22,500 in yearly depreciation
multiplied by five years.

Accumulated Depreciation and Book Value

Accumulated depreciation is used in calculating an asset’s net book value. This is the amount a
company carries an asset on its balance sheet. Net book value is the cost of an asset subtracted by
its accumulated depreciation. For example, a company purchased a piece of printing equipment
for $100,000 and the accumulated depreciation is $35,000, then the net book value of the
printing equipment is $65,000.
Accumulated depreciation cannot exceed an asset’s cost. If an asset is sold or disposed of, the
asset’s accumulated depreciation is removed from the balance sheet. Net book value, however,
isn’t necessarily reflective of the market value of an asset.  

Depreciation Method Examples

Beyond the straight-line method, there's also the declining balance method. This is the only other
depreciation method allowed by the Internal Revenue Service (IRS) for tax purposes. The
declining balance method is calculated as:

\begin{aligned} &\text{DBD = (NBV - SV)} \times \dfrac{1}{\text{UL}}

\times \text{DR}\\ &\textbf{where:}\\ &\text{NBV = Net book value}\\
&\text{SV = Salvage value}\\ &\text{UL = Useful life}\\ &\text{DR =
Depreciation rate}\\ \end{aligned}DBD = (NBV - SV)×UL1
×DRwhere:NBV = Net book valueSV = Salvage valueUL = Useful life
DR = Depreciation rate