Accumulated depreciation refers to the tracking of total depreciation realized for an asset over its useful life. Tracking accumulated depreciation against an asset is required to ensure the depreciation claimed does not exceed the Book Value of the asset in question. Accumulated depreciation tracking, generally following where the value of the asset is specified, is required by the double declining depreciation method. If you’re calculating depreciation without the help of an accountant, it’s advisable to add a note on your balance sheet, specifying the accumulated depreciation and book value.
Every year businesses write off a portion of a depreciable asset using double declining balance by subtracting the amount depreciated from the book value of the asset on your balance sheet. In Year 1, the book value will be always be the cost of the asset, and that goes down as depreciation is realized.
Accumulated Depreciation Formula
Accumulated depreciation is calculated as follows:
Accumulated Depreciation Balance = Accumulated Depreciation at Start of year + Depreciation over Period
Accumulated Depreciation Example
Here’s an example of accumulated depreciation for the following scenario:
- Purchase Price: Your company purchases a computer which costs $1,800 after all taxes and expenses.
- Useful Life: Per the IRS Useful Life Table, computers may be depreciated over a 5 year useful life.
- Salvage Value: $300
| Book |
|1||$720||$720||($1800 – $720) = $1,080|
|2||$432||($720 + $432) = $1,152||($1,800 – $1,152) = $648|
|3||$259||($1,152 + $259) = $1,411||($1,800 – $1,411) = $389|
|4||$89||($1,411 + $89) = $1,500||($1,800 – $1,500) = $300|
|5||$0||($1,500 + $0) = $1,500||($1,800 – $1,500) = $300|
The asset will be depreciated in Years 1, 2, and 3. and Then it Year 4 it will reach it salvage value at which point depreciation can no longer be claimed.
What type of account is accumulated depreciation?
Accumulated depreciation is regarded as a contra asset account as its balance is a credit which reduces the value of the asset. The book value and carrying value of the asset should be tracked on the company’s balance sheet, with clear numbers for original cost, and accumulated depreciation.
When it’s time to select a depreciation method, consider enlisting the help of a CPA as depreciation can be complex, and this is merely an introduction. An experienced CPA will be able to guide you through the process, avoiding costly mistakes along the way.