Definition of Accumulated Depreciation
Accumulated Depreciation is a general ledger contra asset account associated with a company's property, plant and equipment. The credit balance in this account gets to be a larger credit balance whenever depreciation expense is recorded.
When an asset is disposed of (sold, retired, scrapped) the credit balance in Accumulated Depreciation is reduced when the asset's credit balance is removed by debiting Accumulated Depreciation.
[When an asset is sold, the depreciation expense must be recorded up to the date of the sale. Next, the asset's cost and its accumulated depreciation are removed from the accounts. Any money received is debited to Cash and any gain or loss on the sale is also recorded.]
Example of a Reduction in Accumulated Depreciation
Assume that a company has lots of equipment with a total cost of $600,000 that is reported in the asset account Equipment. The company's total amount of accumulated depreciation is $380,000 which appears as a credit balance in the contra asset account Accumulated Depreciation.
Now assume that the company sells one piece of equipment that had a cost of $50,000 and had accumulated depreciation of $40,000 at the end of the previous accounting year. The first step is to record this year's depreciation for the equipment being sold. Let's assume the depreciation from the end of the previous accounting year until the date of the sale is $500. Therefore, the credit balance for this one piece of equipment at the time of the sale is $40,500.
If the company receives $5,000 when disposing of the equipment, the journal entry to record the sale is:
- A debit to Cash for $5,000
- A debit to Accumulated Depreciation for $40,500 which reduces the account's credit balance
- A debit to Loss on Sale of Asset for $4,500 (received $5,000 for an asset having a book value of $9,500)
- A credit to Equipment for $50,000
Below is a summary of how the balance in Accumulated Depreciation had changed from the disposal of the asset:
- Credit balance in Accumulated Depreciation before the sale $380,000
- Credit of $500 for the current accounting period's depreciation expense
- Credit balance of $380,500 after the current period's $500 of depreciation expense
- Debit of $40,500 to remove the asset's accumulated depreciation
- Credit balance in Accumulated Depreciation after sale is $340,000