1. Accumulated Depreciation
2. Understanding Accumulated Depreciation
3. To Calculate Accumulated Depreciation
Accumulated depreciation is the accretive Depreciation of an asset up to a single point in its life. Accumulated depreciation is a contra-asset account, meaning its natural balance is a credit that reduces the overall asset value.
- Depreciation is recorded to tie the cost of using a long-term capital asset with the benefit gained from its use over time.
- Accumulated depreciation is the sum of all recorded Depreciation on an asset to a specific date.
- Accumulated depreciation is presented on the balance distance just below the affiliated capital asset line.
- Accumulated depreciation is recorded as a contra asset that has a natural credit balance (as opposed to asset accounts with natural disbenefit balances).
- The carrying value of an asset is its literal cost minus accumulated depreciation.
Understanding Accumulated Depreciation
The matching principle under generally accepted account principles (GAAP) dictates that charges must be matched to the same account period in which the affiliated profit is generated. Through Depreciation, a business will expense a portion of a capital asset’s value over each time of its useful life. This means that each time a capitalized asset is put to use and generates profit, the cost associated with using up the asset is recorded. Accumulated depreciation is the total amount an asset has been downgraded up until a single point. Each period, the Depreciation expenditure recorded in that period is added to the morning accumulated depreciation balance. An asset’s carrying value on the balance distance is the difference between its literal cost and accumulated depreciation. At the end of an asset’s useful life, it carrying value on the balance distance will match its salvage value. When recording Depreciation in the general tally, a company disbenefits Depreciation expenditure and credits accumulated depreciation. Depreciation expenditure flows through to the income statement in the period it’s recorded. Accumulated depreciation is presented on the balance distance below the line for affiliated capitalized assets. The accumulated depreciation balance increases over time, adding the amount of Depreciation expenditure recorded in the current period.
To Calculate Accumulated Depreciation
There are several respectable styles for calculating Depreciation. These styles are permissible under Generally Accepted Accounting Principles (GAAP). A company may elect the Depreciation method they wish to use.
Straight- Line method
Under the straight-line method of account, a company deducts the asset’s salvage value from the purchase price to find a depreciable base. also, this base is accumulated unevenly over the anticipated useful life of the asset. The straight-line method formula is
Annual Accumulated depreciation = (Asset Value – Salvage Value) Useful Life in Years
Imagine Company ABC buys a structure for $ 250,000. The structure is anticipated to be useful for 20 years with a value of$ 10,000 at the end of the 20th time. The depreciable base for the structure is $ 240,000 ($ 250,000-$ 10,000). Divided over 20 years, the company would honor $ 20,000 of accumulated depreciation every time.
Declining Balance Method
Under the declining balance method, Depreciation is recorded as a chance of the asset’s current book value. Because the same chance is used every time while the current book value decreases, the amount of Depreciation decreases each time. Indeed, though accumulated depreciation will still increase, the amount of accumulated depreciation will drop each time.
Annual Accumulated depreciation = Current Book Value * Depreciation Rate
Double- Declining Balance method
Under the double-declining balance (also called accelerated depreciation), a company calculates what its Depreciation would be under the straight-line method. also, the company doubles the Depreciation rate, keeps this rate the same across all years the asset is downgraded, and continues to accumulate Depreciation until the salvage value is reached.
Sum- of- the- Years’ integers Method
Under the sum- of- the- years integers method, a company strives to record further Depreciation before in the life of an asset and lower in the after years. This is done by adding up the integers of the useful years, also cheapening grounded on that number of times. Annual Accumulated depreciation = Depreciable Base *(Inverse Year Number/ Sum of Year Digits)