Which contra account is used in recording depreciation?

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“Accumulated Depreciation” is the contra account used to record depreciation.

Let me help you understand the meaning of accumulated depreciation.

Meaning of Accumulated Depreciation

Accumulated Depreciation is the total cumulative depreciation of tangible fixed assets up to a particular date. It is associated with assets such as plant & machinery, furniture & fixtures, equipment, building, vehicles, etc. It is the total depreciation already charged as an expense over the estimated useful life of the assets. It is a contra asset account & has a credit balance.

Accumulated depreciation is presented in the balance sheet and reduced from the gross amount of fixed tangible assets to derive the net value of the asset.

 

Example of Accumulated Depreciation

Suppose Chocolate Ltd bought a chocolate manufacturing machine worth 500,000 in the month of January 20×1. The estimated useful life of the machine is 5 years with no scrap value.

Following the straight-line method of depreciation, the machine will be depreciated with an amount of 100,000 at the end of every year for 5 consecutive years.

Year-end Depreciation Accumulated Depreciation Net Value of Machine
20×1 100,000 100,000 400,000 (500,000 – 100,000)
20×2 100,000 200,000 300,000 (500,000 – 200,000)
20×3 100,000 300,000 200,000 (500,000 – 300,000)
20×4 100,000 400,000 100,000 (500,000 – 400,000)
20×5 100,000 500,000 Nil (500,000 – 500,000)

 

Journal Entry at the end of each year for 5 consecutive years will be;

Depreciation A/c Debit 100,000
 To Accumulated Depreciation A/c Credit  100,000

The depreciation charged every year will be added to the balance of accumulated depreciation. Then, the entire amount of accumulated depreciation is reduced from the gross amount (cost) of the machine in the balance sheet to arrive at the net value.

 

Journal Entry at the end of 5th year ie. on 31/12/20×5 to remove the machine and accumulated depreciation from the entity’s accounting records will be;

Accumulated Depreciation A/c Debit 500,000
 To Machine A/c Credit  500,000