Having an asset account such as Accumulated Depreciation allows a company's balance sheet to easily report both 1) the amount of an asset's cost that has been depreciated as of the date of the balance sheet, and 2) the asset's cost. This is possible because Accumulated Depreciation is credited each time that Depreciation Expense is debited. Since Accumulated Depreciation will have a continually increasing credit balance it is referred to as a contra asset account.
To illustrate, let's assume that at the beginning of the current year a company's asset account Equipment reports a cost of $70,000. From the time of purchase until the beginning of the year the related Accumulated Depreciation account has accumulated a credit balance of $45,000. During the current year the company debits Depreciation Expense for $10,000 and credits Accumulated Depreciation for $10,000. At the end of the current year the credit balance in Accumulated Depreciation will be $55,000.
By crediting the account Accumulated Depreciation instead of crediting the Equipment account, the balance sheet at the end of the year can easily report both the equipment's cost of $70,000 and its accumulated depreciation of $55,000. This is more informative than reporting only the net amount of $15,000 (which would likely be the case if the contra asset account Accumulated Depreciation was not used).
To learn more, see the Related Topics listed below:
After working as an accountant, consultant, and university accounting instructor for more
than 25 years, Harold Averkamp formed AccountingCoach.com in 2003. His goal was to
share his knowledge and passion for teaching accounting with people throughout the
world at a very low cost. Read More...