Accumulated Depreciation: Everything You Need To Know

It has a negative balance and is used as a contra asset account to offset the asset account with which it is paired, which results in a net book value. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming.

• In accordance with accounting rules, these companies must record as these assets depreciate over their useful lives.
• 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.
• The total decrease in the value of an asset on the balance sheet over time is accumulated depreciation.
• Accumulated depreciation would be reduced from the equipment account and a net amount would be reflected in a balance sheet.

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. Accumulated depreciation is the cumulative depreciation of an asset up to a single point in its life. Accumulated depreciation is a contra asset account, meaning its natural balance is a credit that reduces the overall asset value.

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The purpose of a contra asset account is to store a reserve that reduces the balance in the paired account. By stating this information separately in a contra asset account, a user of financial information can see the extent to which a paired asset should be reduced. Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet. This contra account holds a reserve, similar to the allowance for doubtful accounts.

That is, the company will depreciate $10,000 for the next 10 years until the book value of the asset is $10,000. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.

Presentation of Contra Assets

While reporting depreciation, a company debits depreciation accounts in the general ledger and credits the cumulative depreciation account. Depreciation expenses will pass through the income statement of a specific period when the above entry was passed. These assets are expected to provide future economic benefits for many accounting periods.

Then, the company doubles the depreciation rate, keeps this rate the same across all years the asset is depreciated, and continues to accumulate depreciation until the salvage value is reached. The percentage can simply be calculated as twice of 100% divided by the number of years of useful life. The building is expected to be useful for 20 years with a value of $10,000 at the end of the 20th year. Divided over 20 years, the company would recognized $20,000 of accumulated depreciation every year.

What Is the Benefit of Using a Contra Account?

Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. If you keep a lot of inventory in stock, chances are that some of the inventory will become obsolete. This frequently happens to manufacturing companies that sell products with an expiration date since any inventory remaining in stock past the expiration date quickly becomes obsolete.

Therefore, depreciation expense is recalculated every year, while accumulated depreciation is always a life-to-date running total. Accumulated depreciation for the related capitalized assets is shown on the balance sheet below the line. The accumulated balance of depreciation increases over time, adding the amount of the depreciation expense recorded knowing your customers during the current period. In general, accounts receivable are converted into cash within the operating cycle. This loss is treated as an ordinary business expense and is deducted from the asset’s balance. When you record depreciation on a tangible asset, you debit depreciation expense and credit accumulated depreciation for the same amount.

Types of Contra Assets

For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. 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. It is credited each year as the value of the asset is written off and remains on the books, reducing the net value of the asset, until the asset is disposed of or sold. It is important to note that accumulated depreciation cannot be more than the asset’s historical cost even if the asset is still in use after its estimated useful life.