Introduction
Accumulated depreciation is the total amount of the depreciation expenditure allocated to a particular asset since the asset was used. It is a contra asset account, i.e. a negative asset account that offsets the balance in the asset account with which it is usually linked.
Whenever an organisation records depreciation expenses, the same amount is also credited to the accumulated depreciation account, enabling the company to show both the cost of the asset and the total depreciation of the asset. This also shows the net book value of the asset on the balance sheet.
Understanding Accumulated Depreciation
Under Generally Accepted Accounting Principles (GAAP), the matching principle requires that expenses must be attributed to the same accounting period within which the associated revenue is produced.
By depreciation, a company must invest a portion of the value of a capital asset over its useful life per year. It ensures that a capitalised asset is put to use each year and produces income, the costs associated with the use of the asset are reported.
Accumulated depreciation is the total amount that was depreciated for an asset up to a single point. Each period is added to the opening accumulated depreciation balance, the depreciation expense recorded in that period. The carrying value of an asset on the balance sheet is the difference between its historical cost and accrued amortisation. At the end of the useful life of an asset, its balance sheet carrying value will match its salvage value.
Recording in Books
While reporting depreciation, a company debits depreciation account in the general ledger and credits the cumulative depreciation account. Depreciation expenses will pass through the income statement of a specific period when the above entry was passed.
Accumulated depreciation for the related capitalised assets is shown on the balance sheet below the line. The accumulated balance of depreciation increases over time, adding the amount of the depreciation expense recorded during the current period.
