Accumulated depreciation

Definition

Accumulated depreciation is the total amount of a fixed asset's cost that has been allocated to depreciation expense since the asset was put into use. It reduces the book value of an asset on the balance sheet over its useful life.

5 Must Know Facts For Your Next Test

1. Accumulated depreciation is recorded on the balance sheet as a contra-asset account, reducing the gross amount of fixed assets.
2. It represents the cumulative depreciation expense recognized for an asset since its acquisition.
3. Accumulated depreciation helps in determining an asset's net book value, which is calculated as the original cost minus accumulated depreciation.
4. This concept applies to tangible long-term assets such as buildings, machinery, and equipment.
5. The balance in accumulated depreciation increases each year by the amount of annual depreciation expense charged.

Review Questions

• How does accumulated depreciation affect the book value of a fixed asset?
• Where is accumulated depreciation reported in financial statements?
• What happens to accumulated depreciation if a company disposes of a fully depreciated asset?

Related terms

Depreciation Expense:

The portion of an asset's cost allocated to expense during an accounting period.

Book Value:

The net amount at which an asset appears on the balance sheet, calculated as original cost minus accumulated depreciation.

Useful Life:

The estimated time period over which a fixed asset is expected to be used by a company before it becomes obsolete or needs replacement.