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5 examples that will master you in Accumulated Depreciation!

Accumulated depreciation is the sum of depreciation expense to date from the capitalization date. For example, if an asset is capitalized on 1st March 2017. Accumulated depreciation will be the total of depreciation expense from 1st March 2017 till date. We will call it by the shortcut Acc-dep in this article. This figure is subtracted from the cost of a fixed asset. The figure of fixed assets presented is net of Acc.dep in the balance sheet.

Accumulated Depreciation

Sum of the Depreciation expense recognized to date is called accumulated depreciation (AD). The balance of Acc-dep is carried forward as a credit balance to the next year. This balance is deducted from the cost of non-current assets.

Also, read Audit Assertions

Accumulated Depreciation in Balance Sheet

As stated earlier, Acc-dep is a balance sheet item. It is deducted from the cost of non-current assets. The balance showed in the balance sheet is net of Acc.dep (After deducting Acc.dep)

The figure of non-current assets has two figures:

  • Cost of Non-current assets
  • Less: Acc-dep

The resulting figure is called carrying amount of non-current assets.

The formula of Accumulated Depreciation

The formula used to calculate Acc-dep depends upon the method of depreciation used. Depreciation is normally calculated by the straight-line method. Acc-dep is calculated by the following formula if we use SLM (straight-line method):

Cost of Non-Current Asset * Number of Moths Asset is in Use / Useful Life of the Asset

Accumulated Depreciation Account

Acc-dep has a credit balance. This credit balance is deducted from the cost of non-current asset. The balance of Acc-dep is carried forward to the next year. Acc.dep T account is shown in the image:

T-account-of-Accumulated-depreciation
T account of Accumulated Depreciation

Journal entry for Accumulated Depreciation

As Stated earlier, Acc-dep has a credit balance. So, it is increased when we credit it. That’s why Acc-dep is shown on the credit side in the journal entry. The journal entry to record acc-dep is as follows:

Dr ($)Cr ($)
Depreciation Expensexxx
Accumulated Depreciationxxx

We accumulate all the depreciation expense till date in Acc-dep account. After this we deduct it from our non-current asset:

Is Accumulated Depreciation a Debit or Credit?

Acc-dep is a credit balance. It’s a balance sheet item. It is made up of all the depreciation expense recognized till date since the capitalization date of the asset. If we want to increase acc.dep, we credit it. Similarly, if we want to decrease acc-dep, we debit it.

As stated earlier, the normal balance of acc-dep is credit.

Accumulated Depreciation Asset or Liability?

Acc-dep is neither an asset nor a liability. It is depreciation expense of an asset accumulated to date since its inception.

Accumulated Depreciation vs Depreciation Expense

  1. Depreciation expense is a profit or loss item while acc-dep is a balance sheet item.
  2. Depreciation expense represents the expense for the current period whilst acc-dep represents depreciation expense to date since the capitalization date.
  3. Depreciation expense is deducted from the gross profit whilst acc-depreciation is deducted from the cost of a non-current asset. (Acc-dep is the sum of dep expense for the current period plus any prior period depreciation expense)
  4. Depreciation expenses is a debit balance while acc-dep is a credit balance.
Difference-between-depreciation-expense-and-accumulated-depreciation
Comparison of Depreciation Expense and Accumulated Depreciation

Can Accumulated Depreciation be deducted from Current Assets?

The answer is no. Depreciation expense is recognized for non-current assets only. Current assets have a shorter life (Usually less than 12 months). Therefore, we do not recognize any depreciation expense on current assets. If there is no depreciation expense, there is no acc-depreciation as well.

Accumulated Depreciation Examples

  1. Suppose NHIRKM purchased machinery for $50,000 cash on 1st Jan 2020. They estimate that the machinery can be used for 5 years and after that, it will have a scrap value of $1,000.

Required:

  • Calculate the annual depreciation using the straight-line method
  • Calculate the accumulated dep as at 31st Dec 2021.

2. SMART Limited purchased a plant for $65,000 cash on 1st July 2020. They estimate that the plant can be used for 6 years. It will have a scrap value of $5,000. The year ends on 31 December.

Required:

Write up for 2020 and 2021 the:

  • Plant Account and
  • Accumulated Depreciation Account.

Sana Ali Khan

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