Business Finance 101 – What is the Accumulated Depreciation account and why is it an asset?

December 20, 2012 by Account keeping plus (Business accounting software 1 Comment

What is the Accumulated Depreciation account and why is it an asset?

The Accumulated Depreciation account is where a company’s balance sheet reports the amount of an asset’s cost that has been depreciated (written off) as of the date of the balance sheet. The asset’s original cost is recorded in the asset account, eg. Motor Vehicle at Cost, Office Equipment at Cost, Plant & Equipment at Cost. They are shown by having the Assets at Cost account which is debited when assets are posted there and the 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. The increase is usually done at year end when the accountant calculates the amount that can be claimed, and you should adjust the Accumulated Depreciation by the amount calculated.
As an example let’s say that at the beginning of the current year a company’s asset account Plant & Equipment has a balance of $70,000 which will be the at-cost amount (after GST) from the previous year. From the time of purchase until the beginning of the current year the related Accumulated Depreciation account has accumulated a credit balance of $45,000. The Balance Sheet will also report the net of $70,000 less $45,000 leaving a Plant & Equip balance of $25,000 which will be used to calculate the next depreciation allowable. So at the end of the current year the company debits Depreciation Expense for $7,500 (if that is the calculation at 30%) and credits Accumulated Depreciation for $7,500. At the end of the current year the credit balance in Accumulated Depreciation will be $52,500.

Start of Year
Plant & Equip                             $70,000          is constant unless more equip purchased
Accum Deprec                          -$45,000
Total Plant & Equip                  $25,000

End of Year
Plant & Equip                             $70,000
Accum Deprec                           -$52,500        has $45,000 plus $7,500 (if that is the depreciation calculated)
Total Plant & Equip                   $17,500

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