Definition of Accumulated Depreciation
The account Accumulated Depreciation reports the total amount of depreciation expense that has been recorded from the time the asset was put into service until the date of the balance sheet. By crediting Accumulated Depreciation (instead of crediting the asset account which has the asset's original cost), it allows for the balance sheet to report or disclose the following:
- The original cost of the asset being depreciated
- The amount of depreciation expense reported so far (the balance in Accumulated Depreciation)
- The amount that has not yet been depreciated (the book value of the asset)
Example of Accumulated Depreciation
Let's assume that at the beginning of the current year a company's asset account Equipment reported a cost of $70,000. From the time the equipment was put into service until the beginning of the year the related Accumulated Depreciation account shows 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. Therefore, at the end of the current year the credit balance in Accumulated Depreciation is $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, the net of which is $15,000. 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).