Accumulated Depreciation
Accumulated depreciation is the amount of total depreciation expense that has been charged on the asset since the date of its recognition. It is a contra-account to the relevant fixed asset cost account. Carrying amount (i.e. written down value) of a fixed asset is determined as cost of the asset less the related accumulated depreciation.
Formula
Accumulated depreciation is an important component of the fixed asset schedule which shows the movement (i.e. additions and/or disposals) of fixed assets during a particular period.
Closing accumulated depreciation balance is calculated as follows:
| 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 |
Journal Entries
When a fixed asset is depreciated, the depreciation expense is debited and accumulated depreciation is credited.
| Depreciation expense | ABC | |
| Accumulated depreciation | ABC |
It is important to not credit the cost account of the relevant fixed asset directly because accounting standards require companies to show both the cost of fixed assets and their related accumulated depreciation on their balance sheets or notes to the financial statements.
When an asset is disposed off, not only cost but also the related accumulated depreciation is written off as follows:
| Accumulated depreciation | DEF | |
| Cost | DEF |
The normal balance of accumulated depreciation account is credit.
Example
Prepare the machinery component of fixed asset schedule of RST, Inc. for financial year ended 30 December 2014 based on the following information:
- Cost as at 1 January 2014: $8,540,000
- Accumulated depreciation as at 1 January 2014: $2,430,000
- No additions to machinery made during the period.
- Machinery costing $350,000 with accumulated depreciation of $200,000 disposed off on 30 June 2014.
- The company’s policy is to charge proportionate depreciation expense in the year of disposal.
- The machinery is depreciated on straight line method over 5 years.
Solution
| Cost | ||
| Balance as at 1 January 2014 | A | 8,540,000 |
| Additions | B | 0 |
| Disposals | C | 350,000 |
| Balance as at 31 December 2014 | D = A + B – C | 8,190,000 |
| Accumulated depreciation | ||
| Balance as at 1 January 2014 | E | 2,430,000 |
| Depreciation for the period | F | 1,673,000 |
| Disposal adjustment | G | 235,000 |
| Balance as at 31 December 2014 | H = E + F – G | 3,868,000 |
| Carrying amount as at 1 January 2014 | A – E | 6,110,000 |
| Carrying amount as at 31 December 2014 | D – H | 4,322,000 |
| Depreciation Expense for the Period (F) | |||||
| = | $8,540,000 | + | $350,000 | × | 6 |
| 5 | 5 | 12 | |||
| = $1,673,000 | |||||
Proportionate depreciation for 6 months is charged on the asset disposed off.
| Disposal Adjustment (G) | |||||
| = $200,000 + | $350,000 | × | 6 | ||
| 5 | 12 | ||||
| = $235,000 | |||||
by Obaidullah Jan, ACA, CFA and last modified on