Total cumulative depreciation of a tangible asset up to a specific date is called Accumulated Depreciation. It is the total depreciation already charged as expense in different accounting periods. It is a contra-asset account which, unlike an asset account, has a credit balance.
It is shown on the balance sheet as a deduction from gross fixed assets.
Original Cost of Asset – Accumulated Depreciation = Net Cost (or) Carrying Value (or) Book Value
Let’s assume that a company buys a vehicle for 50,000 with a lifespan of 5 years and no scrap value. According to the straight line method of depreciation, the asset will be depreciating at 10,000/year.
|Accumulated Depreciation||Carrying Value|
|Year 1||10,000||50,000 – 10,000 = 40,000|
|Year 2||10,000 x 2||40,000 – 10,000 = 30,000|
|Year 3||10,000 x 3||30,000 – 10,000 = 20,000|
|Year 4||10,000 x 4||20,000 – 10,000 = 10,000|
|Year 5||10,000 x 5||10,000 – 10,000 = 0|
The purpose of a contra-asset account such as this is to reduce the book value of an asset to show the loss of value due to wear and tear.
Companies buy assets such as buildings, furniture, machinery, etc., all of which lose their value with everyday use. This depreciation loss is to be accounted for in the books of accounts to show the most accurate picture of the financial statements of a business.
Journal Entries related to Accumulated Depreciation
In the above table, the journal entries would be:
- A journal entry to be done annually to show the accumulated depreciation.
|To Accumulated Depreciation A/C||10,000|
- After 5 years the machine’s scrap value is zero. To remove both the vehicle and its related depreciation from the company’s accounting records.
|Accumulated Depreciation A/C||50,000|
|To Vehicle A/C||50,000|
>Read Contra Account