Accumulated depreciation is the total amount of depreciation expense allocated to a specific asset since the asset was put into use. It is a contra-asset account – a negative asset account that offsets the balance in the asset account it is normally associated with.
Unlike a normal asset account, a credit to a contra-asset account increases its value while a debit decreases its value. Whenever depreciation expense is recorded for an organization, the same amount is also credited to the accumulated depreciation account, allowing the company to show both the cost of the asset and total-to-date depreciation of the asset. This also shows the asset’s net book value on the balance sheet.
This article will also discuss:
- Is Accumulated Depreciation a Current Asset or Fixed Asset?
- Understanding Accumulated Depreciation
- Recording in Books
- Is Accumulated Depreciation a Current or Long-Term Asset?
Is Accumulated Depreciation a Current Asset or Fixed Asset?
As we mentioned above, depreciation is not a current asset. It is also not a fixed asset.
Depreciation is the method of accounting used to allocate the cost of a fixed asset over its useful life and is used to account for declines in value. It helps companies avoid major losses in the year it purchases the fixed assets by spreading the cost over several years.
Current assets are not depreciated because of their short-term life.
Understanding Accumulated Depreciation
Under Generally Accepted Accounting Principles (GAAP), the matching principle requires that expenses must be attributed to the same accounting period within which the associated revenue is produced.
By depreciation, a company must invest a portion of the value of a capital asset over its useful life per year. It ensures that a capitalized asset is put to use each year and produces income, the costs associated with the use of the asset are reported.
Accumulated depreciation is the total amount that was depreciated for an asset up to a single point. Each period is added to the opening accumulated depreciation balance, the depreciation expense recorded in that period. The carrying value of an asset on the balance sheet is the difference between its historical cost and accrued amortization. At the end of the useful life of an asset, its balance sheet carrying value will match its salvage value.
Recording in Books
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.
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 during the current period.
Is Accumulated Depreciation a Current or Long-Term Asset?
Accumulated depreciation is an asset account with a credit balance known as a long-term contra asset account that is reported on the balance sheet under the heading Property, Plant, and Equipment. The amount of a long-term asset’s cost that has been allocated, since the time that the asset was acquired.