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What is Accumulated Depreciation?

Accumulated depreciation is the total depreciation expense allocated to a long-term tangible asset since it was put into use and represents the total value by which a company’s assets have been depreciated. In other words, it’s the amount of costs allocated to depreciation expenditure so far in the useful life of an asset.

Depreciation is the process of reducing the value of assets in the balance sheet by transferring part of it to the profit and loss account for each period.

Accounting for Accumulated Depreciation

The accumulated depreciation account is a contra asset account that reduces the book value of the assets reported on the balance sheet. As the depreciation expense is recognized in profits, the accumulated depreciation balance increases.

Accumulated depreciation subtracted from the cost of an asset is equal to the asset’s net book value.

The depreciation expense for the year is the portion of the initial cost of a company’s fixed asset allocated to a single period. Depreciation expenses are recognized on the income statement as non-cash expenses which decreases the company’s net income.

There are two main methods used to calculate depreciation: the straight-line method and reducing balance method.

The straight-line method expenses the same depreciation charge for each year of a tangible asset’s life. The future benefits of the asset are expensed at the same rate each year.

For the reducing balance method, the amount of depreciation charged to an asset declines each year because the same fixed percentage is applied to the falling value yearly. As a result, we never get an asset value down to zero until it is scrapped.

Formula

The formula to calculate the closing accumulated depreciation balance is:

Accumulated depreciation at the start of the period
+ Depreciation expense for the period
Accumulated depreciation on assets disposed off
= Accumulated depreciation at the end of the period

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Example 1

Calculate the accumulated depreciation at the end of the financial year ended 31 December 2016 based on the information below:

Gross cost as on 1 January 2016

1,000.0

Accumulated depreciation as on 1 January 2016

250.0

Accumulated depreciation on asset disposed of on 31 December 2016

100.0

Useful life of equipment (years)

5

Depreciation during the year = Gross cost / useful life

1,000.0 / 5

200.0

All figures are in ($) thousands

Therefore, accumulated depreciation as on 31 December 2016 is calculated as:

Accumulated depreciation as on 31 December 2016 =
Accumulated depreciation as on 1 January 2016

250.0

+ Depreciation during the year

200.0

Accumulated depreciation on an asset disposed of

(100.0)

Accumulated depreciation as on 31 December 2016

350.0

All figures are in ($) thousands

Example 2

Accumulated depreciation is also calculated as follows:

(Gross cost of Asset – Salvage value)  / Useful life) x Number of years in use

Company DCF purchased mining equipment on 1 January 2012 for $500,000. The equipment has a residual value of $100,000 and an expected useful life of 5 years. Calculate the accumulated depreciation account balance (straight line) as on 31 December 2014.

The accumulated depreciation calculation is:

(Gross cost of Asset – Salvage value) / useful life (500.0 – 100.0) / 5
x Number of years in use x 3
= Accumulated depreciation on 31 December 2014 240.0
All figures are in ($) thousands

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