What is Accumulated Depreciation?

Useful life:

Every asset except land has a useful life over which it provides economic benefits and over which its value deteriorates and ultimately it is required to be scrapped or replaced.

Depreciation:

Depreciation is the adjustment for normal wear and tear of the asset due to its limited useful life and its usage. Depreciation adjustment basically allocates the cost of an asset over its useful life.

Depreciation methods

The two most common methods to calculate the depreciation are:

  1. Straight Line Method
  2. Reducing Balance Method

Straight Line Method

Under this method cost of an asset is allocated uniformly over its useful life. The depreciation is calculated as follows:

=   Cost of an asset – Estimated disposal value (if any)
Number of years of useful life

Example:

A company purchased an asset worth $ 100,000 at the start of year 2015.The asset has an expected useful life of 5 years.

The depreciation for all 5 years would be calculated as follows:

=   100,000
5
=   20,000

The carrying value of an asset over its life would be as follows:

Year

Cost

Depreciation

Accumulated depreciation

Carrying value

$

2015

100,000

20,000

20,000

80,000

2016

100,000

20,000

40,000

60,000

2017

100,000

20,000

60,000

40,000

2018

100,000

20,000

80,000

20,000

2019

100,000

20,000

100,000

0

Reducing Balance Method

This method assumes that assets would be giving its peak performance/production during initial years and its usefulness/ production will deteriorate over time so the pattern of depreciation should match the productivity pattern. Under this method, depreciation is applied to the carrying value which reduces each year resulting in higher depreciation in initial years and reducing depreciation afterward.

The depreciation is calculated by multiplying the carrying value with the depreciation rate.

Example

Using the same data above and assuming a 35% depreciation rate under reducing balance method, the depreciation for the year 2015 and 2016 would be as follows

Depreciation Year 2015   =   100,000  x  35%
=   35,000

Depreciation Year 2016   =   (100,000 – 35,000)  x  35%
=   22,750

The carrying values over the life of asset would be as follows

Year

Cost

Depreciation

Accumulated depreciation

Carrying value

$

2015

100,000

35,000

35,000

65,000

2016

100,000

22,750

57,750

42,250

2017

100,000

14,788

72,538

27,463

2018

100,000

9,612

82,149

17,851

2019

100,000

6,248

88,397

11,603

Accumulated depreciation

Accumulated depreciation is the sum of depreciation recognized to date from the start of the useful life of the asset. It is netted against a fixed asset account while presenting in the balance sheet.

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One thought on “What is Accumulated Depreciation?”

  1. rxoc mining says:

    good article very hopeful

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