Definition of Accumulated Depreciation
Accumulated depreciation is the total amount of a plant asset’s cost that has been allocated to depreciation expense (or to manufacturing overhead) since the asset was put into service. Accumulated depreciation (and the related depreciation expense) are associated with constructed assets such as buildings, machinery, office equipment, furniture, fixtures, vehicles, etc.
Accumulated Depreciation is also the title of the contra asset account. Accumulated Depreciation is credited when Depreciation Expense is debited each accounting period.
Subtracting accumulated depreciation from an asset’s cost results in the asset’s book value or carrying value. Hence, the credit balance in the account Accumulated Depreciation cannot exceed the debit balance in the related asset account.
Example of Accumulated Depreciation
Assume that a company purchased a delivery vehicle for $50,000 and determined that the depreciation expense should be $9,000 for 5 years. Each year the account Accumulated Depreciation will be credited for $9,000. Since this is a balance sheet account, its balance keeps accumulating. Therefore, after three years the balance in Accumulated Depreciation will be a credit balance of $27,000 and the vehicle’s book value will be $23,000 ($50,000 minus $27,000).
It is important to note that an asset’s book value does not indicate the vehicle’s market value since depreciation is merely an allocation technique.
If the vehicle is sold, both the vehicle’s cost and its accumulated depreciation at the date of the sale will be removed from the accounts. If the amount received is greater than the book value, a gain will be recorded. If the amount received is less than the book value, a loss is recorded.
