Accumulated Depreciation and Depreciation Expense

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Accumulated Depreciation and Depreciation Expense

What Is Accumulated Depreciation?

the cumulative depreciation which is charged on an asset throughout its life is termed out as or defined as the Accumulated Depreciation. Or the other words, you can say that it is the total amount of depreciation charged on any fixed asset which includes in it all the expenses in occurred on the fixed asset from the time it was purchased to till date. 

Though, the Accumulated Depreciation has a credit balance which means that it appears on the liabilities side of the balance sheet. 

The depreciation basically reduces the total or gross cost of the asset. Though, in case of accumulated depreciation, it keeps on increasing as the time passes by as the depreciation is being charged on the assets. 

Accumulated Depreciation definition:

The Accumulated Depreciation defines the sum total of all the depreciation which is recorded or noted down for some of the assets. 

The Formula for accumulated depreciation:

Accumulated Depreciation = Cost of the asset – salvage value / useful life of the asset

How to Calculate Monthly Accumulated Depreciation?

Though, the depreciation calculation makes use of 3 basic things which are:

  • The useful lifespan of an asset
  • Expenses incurred, and
  • The accounting method used for calculation.

So, the calculation of accumulated depreciation is quite simple based on the following formula as:

Accumulated depreciation = Cost of the asset – salvage value / useful life of the asset

Accumulated Depreciation can be calculated making use of the two methods of calculating depreciation, which is as follows:

  1. Straight-line method
  2. Declining Balance Method
  • Straight-line method

Under the Straight-line method of depreciation, a similar or same amount of depreciation is charged for the whole year for its usage. You can calculate the Straight-line depreciation as:

By subtracting the salvage value of the asset from the total cost of the asset.

Now, you need to divide the resultant amount by the lifespan or the total number of years of the life of the asset.

And then divide the amount by 12, in order to get the monthly depreciation of the asset. 

  • Declining Balance Method

Under the Declining Balance Method of depreciation, there is a change in the amount of depreciation from year to year or month to month based on the cost of the depreciation or the rate of depreciation used to decline the assets. 

Thus, using a Straight-line depreciation method is quite simple and easy.

Read Here:- What Is the Fixed Asset Turnover Ratio?

Accumulated Depreciation in the Balance sheet:

Accumulated Depreciation is shown up in the balance sheet as follows:

Long-Term Assets  
   Land and Buildings  $ 400,000
   Furniture and Fixtures  $ 55,000
   Leasehold Progresses  $ 54,000
   Vehicles  $ 128,000
      $ 6,37,000
    Less: Accumulated Depreciation  $ 80,000
Total Assets  $ 5,57,000

As shown above, the following long term assets are depreciated off. Though in the case of land & building we do not depreciate land but in all the cost of the building is depreciated. 

And all the other i.e.    Furniture and Fixtures, Leasehold Progresses, Vehicles holds their separate account in which the accumulated depreciation is shown off. 

Other than this, for a single asset balance sheet of Accumulated Depreciation is as follows:

Particulars Amount ( in $ )
Cost of Equipment  $ 459,000
Less Accumulated Depreciation $ 23,000
Book Value of Equipment  $ 4,36,000

Accumulated Depreciation Examples:

Example 1: PQR Ltd purchased machinery for $ 200,000 three years ago. The machinery depreciates by $ 8,000 a year.  Calculate the Accumulated Depreciation for the machinery of PQR Ltd company.

Solution:

Accumulated depreciation = $ 8,000 (depreciation For the year 1) + $ 8,000 (depreciation For the year 2) + $ 8,000 (depreciation For the year 3) = $ 24,000.

So, the company PQR Ltd will keep the record in its books as: Total cost of machinery – Accumulated depreciation on machinery

= $200,000 – $24,000.

= $ 1,76,000

Example 2: An asset A was purchased on 1th Jan 2000 having cost as $ 500,000 and its scrap value is found to be $ 100,000 having a useful life of 10 years. And An asst B was purchased on 1st July 2000 having cost as $ 400,000 and its scrap value is found to be $ 80,000 having a useful life of 20 years. Calculate the accumulated depreciation using the Straight line Method of for Asset A and Diminishing method for Asset B. 

Solution:

Given to us the following data as:

For Asset A: 

  • Cost =$ 500,000
  • scrap value =$ 100,000
  • useful life = 10 years

For Asset B: 

  • Cost = $ 400,000
  • scrap value = $ 80,000
  • useful life = 20 years

So, using the formula as:

Depreciation Expense = (Cost of Asset – Scrap value) / Useful lifetime.

                                        = (500,000 – 100,000) / 10

So,         

Depreciation Expense = 400,000 / 10

= 40,000 p/year.

As Accumulated depreciation = sum of all the depreciation

Suppose the financial year of the company ends on June 30th. Therefore, the depreciation cannot be charged for the whole year for the Financial Year 2000-2001

Thus, we need to divide the annual depreciation expense by 12 as well as multiply it with the number of months of its usage. Which, gives us the following information as:

Depreciation Expense = (40,000 * 6) / 12

                                         = 20,000 (depreciation for 6 months)

Accumulated depreciation Schedule Using Straight Line Method:

The following table represents the Straight Line Accumulated Depreciation For asset A:

Accumulated Depreciation Schedule Using Declining Method For Asset B:

Rate of Depreciation = 1 – (Scrap value / cost value)1/n

                                       = 1 (80,000 / 400,000)1/20

                                       = 7.73    when rounded = 8 Percent

Accumulated Depreciation in Excel:

Taking the example above, we will calculate the Accumulated Depreciation in Excel:

Example 1: PQR Ltd purchased a machinery for $ 200,000 three years ago. The machinery depreciates by $ 8,000 a year.  Calculate the Accumulated Depreciation for PQR Ltd company’s machinery.

Solution: Accumulated depreciation = $ 8,000 (depreciation For the year 1) + $ 8,000 (depreciation For the year 2) + $ 8,000 (depreciation For the year 3) = $ 24,000.

So, the company PQR Ltd will keep the record in its books as: Total cost of machinery – Accumulated depreciation on machinery

= $200,000 – $24,000.

= $ 1,76,000

A B
1 Total cost of machinery $ 200,000
2 Accumulated depreciation on machinery $ 24,000.
3 Cost after Accumulated depreciation =(B1-B2)

 

A B
1 Total cost of machinery $ 200,000
2 Accumulated depreciation on machinery $ 24,000.
3 Cost after Accumulated depreciation $ 1,76,000

Example 2: An asset A was purchased on 1th Jan 2000 having cost as $ 500,000 and its scrap value is found to be $ 100,000 having a useful life of 10 years. And an asset B was purchased on 1st July 2000 having cost as $ 400,000 and its scrap value is found to be $ 80,000 having a useful life of 20 years. Calculate the accumulated depreciation using the Straight Line Method of for Asset A and Diminishing method for Asset B. 

Solution:

Given to us the following data as:

For Asset A: 

  • Cost =$ 500,000
  • scrap value =$ 100,000
  • useful life = 10 years

For Asset B: 

  • Cost = $ 400,000
  • scrap value = $ 80,000
  • useful life = 20 years

So, using the formula as:

Depreciation Expense = (Cost of Asset – Scrap value) / Useful lifetime.

                                        = (500,000 – 100,000) / 10

So,         

Depreciation Expense = 400,000 / 10

= 40,000 p/year.

As Accumulated depreciation = Sum of all the depreciation

Suppose the financial year of the company ends on June 30th. Therefore, the depreciation cannot be charged for the whole year for the Financial Year 2000-2001

Thus, we need to divide the annual depreciation expense by 12 as well as multiply it with the number of months of its usage. Which, gives us the following information as:

Depreciation Expense = (40,000 * 6) / 12

                                         = 20,000 (depreciation for 6 months)

Accumulated depreciation Schedule Using Straight Line Method in excel:

The following table represents the Straight Line Accumulated Depreciation in excel For asset A:

A B C D E F
1 S.No Accounting Period Cost of Asset Depreciation Accumulated Depreciation Current Value
2 1 2001 500,000 20,000 20,000 =(C2-E2)
3 2 2002 480,000 40,000 60,000 =(C3-E3)
4 3 2003 440,000 40,000 100,000 =(C4-E4)
5 4 2004 400,000 40,000 140,000 =(C5-E5)
6 5 2005 360,000 40,000 180,000 =(C6-E6)
7 6 2006 320,000 40,000 220,000 =(C7-E7)
8 7 2007 280,000 40,000 260,000 =(C8-E8)
9 8 2008 240,000 40,000 300,000 =(C9-E9)
10 9 2009 200,000 40,000 340,000 =(C10-E10)
11 10 2010 160,000 40,000 380,000 =(C11-E11)

After applying the formula in excel:

A B C D E F
1 S.No Accounting Period Cost of Asset Depreciation Accumulated Depreciation Current Value
2 1 2001 500,000 20,000 20,000 480,000
3 2 2002 480,000 40,000 60,000 440,000
4 3 2003 440,000 40,000 100,000 400,000
5 4 2004 400,000 40,000 140,000 360,000
6 5 2005 360,000 40,000 180,000 320,000
7 6 2006 320,000 40,000 220,000 280,000
8 7 2007 280,000 40,000 260,000 240,000
9 8 2008 240,000 40,000 300,000 200,000
10 9 2009 200,000 40,000 340,000 160,000
11 10 2010 160,000 40,000 380,000 120,000

Accumulated Depreciation Schedule Using Declining Method For Asset B:

Rate of Depreciation = 1 – (Scrap value / cost value)1/n

                                       = 1 (80,000 / 400,000)1/20

                                       = 7.73    when rounded = 8 Percent

A B C D E F
1 Financial Year Cost Value Percentage Depreciation Expense for the period Accumulated Depreciation Exp Written Down Value of the Asset= (cost – Dep)
2 2001 400,000 8 32,000 32,000 =(B2-D2)
3 2002 368,000 8 29,440 61,440 =(B3-D3)
4 2003 338,560 8 27,085 88,525 =(B4-D4)
5 2004 311,475 8 24,918 113,443 =(B5-D5)
6 2005 286,557 8 22,925 136,367 =(B6-D6)
7 2006 263,633 8 21,091 157,458 =(B7-D7)
8 2007 242,542 8 19,403 176,861 =(B8-D8)
9 2008 223,139 8 17,851 194,712 =(B9-D9)
10 2009 205,288 8 16,423 211,135 =(B10-D10)
11 2010 188,865 8 15,109 226,245 =(B11-D11)
12 2011 173,755 8 13,900 240,145 =(B12-D12)
13 2012 159,855 8 12,788 252,933 =(B13-D13)
14 2013 147,067 8 11,765 264,699 =(B14-D14)
15 2014 135,301 8 10,824 275,523 =(B15-D15)
16 2015 124,477 8 9,958 285,481 =(B16-D16)
17 2016 114,519 8 9,162 294,643 =(B17-D17)
18 2017 105,357 8 8,429 303,071 =(B18-D18)
19 2018 96,929 8 7,754 310,825 =(B19-D19)
20 2019 89,175 8 7,134 317,959 =(B20-D20)

After applying the formula in excel:

A B C D E F
1 Financial Year Cost Value Percentage Depreciation Expense for the period Accumulated Depreciation Exp Written Down Value of the Asset= (cost – Dep)
2 2001 400,000 8 32,000 32,000 368,000
3 2002 368,000 8 29,440 61,440 338,560
4 2003 338,560 8 27,085 88,525 311,475
5 2004 311,475 8 24,918 113,443 286,557
6 2005 286,557 8 22,925 136,367 263,633
7 2006 263,633 8 21,091 157,458 242,542
8 2007 242,542 8 19,403 176,861 223,139
9 2008 223,139 8 17,851 194,712 205,288
10 2009 205,288 8 16,423 211,135 188,865
11 2010 188,865 8 15,109 226,245 173,755
12 2011 173,755 8 13,900 240,145 159,855
13 2012 159,855 8 12,788 252,933 147,067
14 2013 147,067 8 11,765 264,699 135,301
15 2014 135,301 8 10,824 275,523 124,477
16 2015 124,477 8 9,958 285,481 114,519
17 2016 114,519 8 9,162 294,643 105,357
18 2017 105,357 8 8,429 303,071 96,929
19 2018 96,929 8 7,754 310,825 89,175
20 2019 89,175 8 7,134 317,959 82,041

Is accumulated depreciation a current asset?

No, the Accumulated depreciation is not included or categorized as a current asset, as it has a credit balance representing the past value of the asset. 

Accumulated depreciation journal entry:

In the journal entry of accumulated depreciation, the record of accumulated depreciation is kept by debiting the Depreciation Expense account and the Accumulated Depreciation account is credited. 

So, it is represented in the journal as in the books:

Particulars Amount (Debit) Amount (Credit)
Depreciation Expense account XXX
Accumulated Depreciation account XXX

Accumulated depreciation debit or credit?

The accumulated depreciation is a credit account balance, which reduces the value of the fixed assets in the balance sheet.

Is accumulated depreciation an asset?

accumulated depreciation Account is included among the asset account and thus, has a credit balance. So, yes, we can say that accumulated depreciation is an asset as accumulated depreciation appears on the credit side. Moreover, it is also reduced from the gross assets in the balance sheet of the company or the firm. 

Accumulated depreciation in cash flow:

Though, the accumulated depreciation is shown up in the balance sheet only. But in the Income statement or the cashflow, it comes under the heading the net income depicting the expense, as well as it is also added back to the income. So, the accumulated depreciation does not affect the Income statement or the cash flow of the company. 

Difference between depreciation and accumulated depreciation:

The total amount by which an asset depreciated is termed up as accumulated depreciation, whereas the amount of expense of depreciation included for a single period is termed up as depreciation.

Conclusion:

The accumulated depreciation calculates the total depreciation expense incurred by a single asset. It is treated as an expense and holds a separate account with a credit balance.

FAQ

The sum total of all the depreciation which is charged on an asset is noted down in an account known as the accumulated depreciation account.

The total amount by which an asset depreciated is termed up as accumulated depreciation, whereas the amount or expense of depreciation included for a single period is termed up as depreciation.

Yes, the accumulated depreciation is shown on the liabilities side of the balance sheet.

The simplest method for calculating deprecation is the Straight line method as the amount of deprecation remains the same for all the years.

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