Course Outline
Join PRO

What causes a reduction in Accumulated Depreciation?

Author:
Harold Averkamp, CPA, MBA

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
Join PRO to Track Progress
Must-Watch Video

Advance Your Accounting and Bookkeeping Career

  • Perform better at your job
  • Get hired for a new position
  • Understand your small business
  • Pass your accounting class
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews

Features

PRO

PRO Plus

Features
Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Word Scrambles
Crosswords
Bookkeeping Video Training
Financial Statements Video Training
Flashcards
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

Certificates of
Achievement

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus