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Depreciation is a wear and tear of an asset due to the efflux of time and various other factors. It’s basically an allocation of the cost of a tangible asset over its useful life.
Accumulated depreciation is the total depreciation charged on an asset until a specified date. It’s a contra asset account. And since it’s a contra asset account it reduces the balance of an asset i.e reduces debit balance and therefore has a credit balance.
Accumulated Depreciation is an Asset or a Liability?
Well if you ask me I would say that it’s neither an asset nor a liability.
Reasons to justify the above statement:
Why is it not an asset?
Assets are the resources held by an entity so that they could provide some economic value for the entity. But, in the case of accumulated depreciation, it does not generate any economic benefit for an entity rather it indicated that a certain sum of economic benefit has already been availed.
Why is it not a liability?
A liability is an obligation of an entity for making payment at a specified future date to a third party. Here, accumulated depreciation does not represent an obligation of an entity rather it is maintained just for the purpose of record-keeping.
According to the reasons mentioned above, it can neither be called an asset nor a liability. This would be the correct answer to this question.
But still, if you have to compulsorily classify the same as an asset or a liability I would definitely not classify it as a liability as it would not ensure fair representation of the financial statements since then it would be considered an obligation made to a third party which is not the case here.
>Related Long Quiz for Practice Quiz 39 – Depreciation