Accumulated Depreciation

Accumulated Depreciation: Everything You Need to Know

What is accumulated depreciation?

Accumulated depreciation is the total amount of depreciation recognized on a long-lived asset from its acquisition to a given date. It reflects the portion of an asset’s cost that has been expensed and is reported on the balance sheet as a contra asset, reducing the gross carrying amount of the related fixed asset.

Common assets that accumulate depreciation:
* Buildings
* Vehicles
* Furniture
* Computers and equipment

Key takeaways

• Accumulated depreciation = sum of all depreciation recorded on an asset to date.
• It is recorded as a contra asset (credit balance) and presented below the related capital asset on the balance sheet.
• Depreciation expense (income statement) is the current-period charge; accumulated depreciation is the running total.
• Carrying (book) value = historical cost − accumulated depreciation.

Methods to calculate depreciation

Under GAAP, several methods are allowable. Choice depends on expected pattern of economic benefit.

List of common methods:
* Straight-line
* Declining-balance
* Double-declining-balance (accelerated)
* Sum-of-the-years’ digits (accelerated)
* Units of production
* Half-year (convention for partial-year acquisitions)

Straight-line

Allocates the depreciable base evenly over useful life.

Formula:
Annual depreciation = (Cost − Salvage value) ÷ Useful life (years)

Example: A $250,000 building with $10,000 salvage and 20-year life → (250,000 − 10,000) ÷ 20 = $12,000 per year.

Declining-balance

Applies a constant depreciation rate to the asset’s book value each year, producing larger charges early and smaller ones later.

Formula:
Annual depreciation = Current book value × Depreciation rate

Example: $10,000 asset, 20% rate → Year 1 = $2,000; Year 2 = ($10,000 − $2,000) × 20% = $1,600; etc.

Double-declining-balance (DDB)

An accelerated method that doubles the straight-line rate and applies it to book value each year until the salvage value (or remaining depreciable amount) is reached.

Procedure:
1. Straight-line rate = 100% ÷ Useful life.
2. DDB rate = 2 × Straight-line rate.
3. Annual depreciation = Book value × DDB rate (stop or adjust so book value does not drop below salvage).

Sum-of-the-years’ digits (SYD)

Another accelerated method that weights earlier years more heavily.

Procedure:
1. SYD = sum of the digits of the useful life (e.g., for 5 years: 5+4+3+2+1 = 15).
2. Fraction for year n = remaining life at start of year ÷ SYD.
3. Annual depreciation = Depreciable base × fraction.

Example (depreciable base $15,000, 5-year life): Year 1 = $15,000 × (5/15) = $5,000; Year 2 = $15,000 × (4/15) = $4,000; … Year 5 = $15,000 × (1/15) = $1,000.

Units of production

Charges depreciation based on actual usage or output.

Formula:
Annual depreciation = (Units used in period ÷ Estimated total units) × Depreciable base

Example: If an asset is expected to produce 80,000 units and it produces 8,000 units in year 1, year‑1 depreciation = 8,000 ÷ 80,000 = 10% of the depreciable base.

Half-year recognition (mid‑year convention)

Recognizes half a year of depreciation in the year of acquisition and half a year in the final year. Used to allocate depreciation fairly when assets are placed in service partway through a year.

Accounting adjustments and changes in estimates

Depreciation is based on estimates (useful life, salvage value). If estimates change, the adjustment is treated as a change in accounting estimate, not a retroactive restatement. The remaining book value is depreciated over the revised remaining useful life prospectively.

Example: If an asset has $6,000 book value remaining and the remaining life is revised to six years, annual depreciation going forward = $6,000 ÷ 6 = $1,000.

Accumulated depreciation vs. accelerated depreciation

• Accumulated depreciation is the total amount of depreciation recognized to date.
• Accelerated depreciation refers to methods (like DDB or SYD) that allocate more depreciation to early years. Accelerated methods cause accumulated depreciation to grow faster in early periods.

Accumulated depreciation vs. depreciation expense

• Depreciation expense: the current-period charge reported on the income statement (debit).
• Accumulated depreciation: the cumulative credit balance on the balance sheet (credit).
  Journal entry to record periodic depreciation:
• Debit: Depreciation expense
• Credit: Accumulated depreciation

Classification: asset or liability?

Accumulated depreciation is a contra asset account (not a liability). It reduces the gross amount of fixed assets and carries a credit balance.

How to calculate accumulated depreciation

Choose an appropriate depreciation method and apply it each period. Accumulated depreciation equals the sum of all periodic depreciation charges since acquisition.

Bottom line

Accumulated depreciation measures how much of an asset’s cost has been expensed over time. It is a key balance-sheet item that reduces the carrying value of fixed assets and reflects management’s allocation of an asset’s cost over its useful life. Selecting the right depreciation method depends on the asset’s expected usage pattern and the company’s reporting objectives.