 # 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:

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