Calculating Accumulated Depreciation
Accumulated depreciation is the total depreciation recorded against a company’s long-term assets since they were acquired and placed into service. Also, to calculate it, you generally need the asset’s original cost, the depreciation method selected by the company, the asset’s useful life and residual value, and the number of periods the asset has been used. The calculation is important because accumulated depreciation reduces the reported book value of an asset on the balance sheet and shows how much of the asset’s cost has already been allocated to past expenses Simple, but easy to overlook. But it adds up..
What Is Accumulated Depreciation?
Accumulated depreciation is a contra-asset account, meaning it is reported separately from an asset’s original cost and deducted from that cost to determine the asset’s net book value. It normally has a credit balance.
To give you an idea, if a company buys a machine for $40,000 and records $8,000 in depreciation over two years, the machine may appear as follows on the balance sheet:
| Item | Amount |
|---|---|
| Equipment at cost | $40,000 |
| Less: Accumulated depreciation | (8,000) |
| Net book value of equipment | $32,000 |
The company did not necessarily lose $8,000 in cash. Instead, it recognized the cost of using the machine during the periods in which the machine helped generate revenue.
Accumulated depreciation is different from the annual depreciation expense reported on the income statement. Depreciation expense represents the depreciation recorded during one accounting period, while accumulated depreciation represents the total depreciation recorded over the asset’s entire life to date.
How to Calculate Accumulated Depreciation
The basic calculation is:
Ending accumulated depreciation = Beginning accumulated depreciation + Current-period depreciation − Accumulated depreciation removed with disposed assets ± Required adjustments
For a new asset, beginning accumulated depreciation is usually zero. That's why, ending accumulated depreciation is normally the sum of all depreciation charges recorded since the asset was placed into service It's one of those things that adds up..
The most common calculation depends on the depreciation method used And that's really what it comes down to..
Straight-Line Method
Under the straight-line method, an asset’s depreciable cost is spread evenly over its useful life That alone is useful..
The formula is:
Annual depreciation expense = (Original cost − Estimated residual value) ÷ Useful life
Suppose a company purchases office equipment for $10,000. The equipment has an estimated useful life of five years and an expected residual value of $1,000.
Its annual depreciation is:
($10,000 − $1,000) ÷ 5 = $1,800
After one full year:
- Depreciation expense: $1,800
- Accumulated depreciation: $1,800
- Net book value: $8,200
After two full years:
- Annual depreciation expense: $1,800
- Total accumulated depreciation: $3,600
- Net book value: $6,400
Assuming no changes, after five years the accumulated depreciation reaches $9,000. The remaining $1,000 book value represents the estimated residual
