The accumulated depreciation of a tangible asset at the end of its useful life is independent of the depreciation method used
A few key points to remember
Depreciation is recorded to tie the cost of using a long-term capital asset with the benefit gained from its use over time.
Understanding Accumulated Depreciation
The matching principle under generally accepted accounting principles (GAAP) dictates that expenses must be matched to the same accounting period in which the related revenue is generated. Depreciation is the process of recording the cost of using up a capital asset over each year of its useful life.
Straight-Line Method
Under the straight-line method of accounting, a company deducts the asset’s salvage value from the purchase price to find a depreciable base.
Declining Balance Method
Under the declining balance method, depreciation is recorded as a percentage of the asset’s current book value and decreases each year as the book value decreases.
Double-Declining Balance Method
Under the double-declining balance method, a company calculates its depreciation by dividing the amount by the number of years of useful life, then doubles the depreciation rate.
Sum-of-the-Years’ Digits Method
The sum-of-the-years’ digits method calculates depreciation by adding up the digits of the useful years and then depreciating based on that number of years.
Units of Production Method
Under the units of production method, a company estimates the total useful output of an asset and recognizes accumulated depreciation variably based on use.
Accumulated Depreciation vs. Accelerated Depreciation
Accumulated depreciation refers to the life-to-date depreciation that has been recognized that reduces the book value of an asset, while accelerated depreciation refers to a method of depreciation where a higher amount of depreciation is recognized earlier in an asset’s life.
Accumulated Depreciation vs. Depreciation Expense
When an asset is depreciated, the amount of depreciation expense and accumulated depreciation are immediately impacted. Depreciation expense is reported on the income statement, while accumulated depreciation is reported on the balance sheet.
Accounting Adjustments/Changes in Estimate
Companies commonly revise their estimates on the useful life of an asset after two years and do not need to retroactively adjust financial statements. Instead, they change the amount of accumulated depreciation recognized each year.
Half-Year Recognition
A common strategy for depreciating an asset is to recognize a half year of depreciation in the year an asset is acquired, a full year of depreciation in years 2 – 5, and a final half year of depreciation in year 6.
Example of Accumulated Depreciation
The value of an asset is written off each year, and the account referred to as accumulated depreciation increases by $10,000. The account cannot be more than the asset’s historical cost.
Is Accumulated Depreciation a Current Liability?
Accumulated depreciation is not a liability, because the cash obligation has already been satisfied when the asset is purchased or financed.
How Do You Calculate Accumulated Depreciation?
Accumulated depreciation is calculated using several different accounting methods, including the straight-line method, the declining balance method, and the double-declining balance method.
The Bottom Line
Many companies rely on capital assets such as buildings, vehicles, equipment, and machinery as part of their operations. Accumulated depreciation reduces the net book value of the capital asset section.
What are the Main Types of Depreciation Methods?
Depreciation is an expense incurred by an entity to account for the decrease in value of an asset over time.
Double Declining Balance Depreciation Method
Double-declining-balance depreciation is used to account for the loss of value of an asset in the early years of its use.
Sum-of-the-Years-Digits Depreciation Method
The sum-of-the-years-digits method is one of the accelerated depreciation methods. It determines the depreciation expense based on the remaining life of the asset.
Example:
In year 2, the expense would be $4,861 because the RL / SYD number is 7 / 36.
Video Explanation of Depreciation Methods
Why Is Accumulated Depreciation a Credit Balance?
Accumulated depreciation is used to calculate how much of a fixed asset’s cost has been depreciated.
A few key points to remember
Accumulated depreciation is recorded as a credit on the balance sheet, offsetting the debit for the asset. The net difference is the asset’s net book value.
Understanding Accumulated Depreciation
Depreciation allows a company to spread out the cost of an asset over its useful life and avoid recording a significant cost in the year the asset was purchased.
Why Accumulated Depreciation is a Credit Balance
Each year, the depreciation expense account is debited and the accumulated depreciation account is credited. Accumulated depreciation is a contra-asset account, meaning that it offsets the value of the asset that it is depreciating, and allows investors to determine the net book value of a fixed asset.
Example of Accumulated Depreciation
Exxon Mobil Corporation depreciated a $1 million piece of oil drilling equipment at $200,000 per year for three years.
