How does accumulated depreciation work?

Definition

Accumulated depreciation is the running total of depreciation already taken on long-lived assets. On the books, this is a contra-asset, a credit balance that reduces the related cost on the Balance Sheet.

It is not cash set aside to replace the item. It is not this month's depreciation expense by itself, either.

Gross cost tells you what you paid. This account is the wear recorded against that cost to date.

Where it shows up

Balance Sheet: Located with the long-lived assets, as a reduction of their cost.

P&L: Related to depreciation expense.

See also: Depreciation Expense · Net Book Value · Property Plant And Equipment

When you look at your Balance Sheet, accumulated depreciation sits with the long-lived items in non-current assets. Some packs print it as its own line under property, plant, and equipment; others fold it in and show only the net amount.

A large balance relative to cost means a lot of depreciation has already been taken. A small balance can mean new items, or a life that still has years ahead.

The profit and loss statement does not list this account as a line. Depreciation expense is the related P&L charge that feeds it each period.

This account is a non-cash credit. Funding it does not move the bank, and it is not closed out at year end like an expense.

How it works

You start from the original cost of a fixed asset. This account is the credit you hold against that cost.

Each period you debit depreciation expense and credit accumulated depreciation. The expense hits the P&L; this contra-asset grows.

The original cost usually stays on the asset line. Net book value is cost minus this account.

The credit here typically does not exceed the asset's cost. When it equals cost, the item is fully depreciated on the books, even if it is still in use.

This balance is not reset each January. It keeps stacking until the asset is sold or retired.

When the item leaves, you debit this account to remove the stacked depreciation and credit the asset to remove its cost. Any cash and any gain or loss are recorded at the same time, against the remaining book amount.

Straight-line depreciation feeds this account in even amounts. Other methods change the pattern, but they still credit the same contra-asset.

Keep the total reconcilable to a register or a depreciation schedule. A camera that is still in the studio should have a supportable figure here; a camera that was sold should not.

Example

A photography studio's camera rig has $3,000 of depreciation stacked against it. That total got there through entries like this year's charge.

The studio records:

Debit: Depreciation expense $3,000

Credit: Accumulated depreciation $3,000

Depreciation expense hits the P&L for $3,000. This contra-asset now holds $3,000 against the rig's cost.

The Balance Sheet still shows the original cost, reduced by this credit. Cash has not moved.

A reader who subtracts this $3,000 from cost is looking at net book value. That remaining amount is a calculated figure, not this account.

Common mix-ups

Accumulated depreciation is not depreciation expense. The expense is this period's P&L charge; this account is the Balance Sheet credit that holds every period's take so far.

Accumulated depreciation is not cash in a replacement fund. You cannot write a check against it.

Accumulated depreciation is not net book value. Net book value is cost minus this credit; this account is only the minus.

Related terms

• Depreciation Expense: The periodic charge that spreads a fixed asset's cost over its useful life.
• Net Book Value: An asset's original cost minus the depreciation recorded against it.
• Property Plant And Equipment: The balance-sheet grouping for land, buildings, machinery, vehicles, and equipment.
• Fixed Assets: Long-lived physical assets used to run the business rather than resold.
• Depreciation Schedule: The supporting schedule listing each asset, its cost, life, and depreciation to date.
• Fixed Asset Register: The subledger listing every capitalized asset the business owns.
• Asset Disposal: Removing an asset and its accumulated depreciation from the books when it is sold or retired.
• Straight-Line Depreciation: Spreading an asset's cost evenly across each period of its useful life.