Accumulated Depreciation

Definition

Accumulated depreciation is the total amount of a company's assets that have been depreciated over time. It represents the total cost of an asset that has been allocated to expense accounts since the asset was first placed into service.

5 Must Know Facts For Your Next Test

1. Accumulated depreciation is a contra-asset account, meaning it has a credit balance that offsets the gross value of the associated asset.
2. The balance in the accumulated depreciation account increases each period as the current period's depreciation expense is added to it.
3. Accumulated depreciation is used to determine the net book value of an asset, which is the asset's original cost minus the accumulated depreciation.
4. The amount of accumulated depreciation can impact a company's decisions on whether to capitalize or expense an item, as it affects the asset's remaining useful life and value.
5. Accumulated depreciation is an important factor in determining a company's taxable income, as it represents the portion of an asset's cost that has been deducted as an expense.

Review Questions

• Explain how accumulated depreciation is calculated and how it relates to the net book value of an asset.
  • Accumulated depreciation is calculated by adding the current period's depreciation expense to the previous accumulated depreciation balance. This represents the total amount of an asset's cost that has been allocated to expense accounts over the asset's useful life. The net book value of an asset is then determined by subtracting the accumulated depreciation from the asset's original cost, providing the remaining value of the asset on the company's balance sheet.
• Describe how the balance in the accumulated depreciation account can impact a company's decision to capitalize or expense an item.
  • The balance in the accumulated depreciation account is an important factor in determining whether a company should capitalize or expense an item. If an asset has a significant amount of accumulated depreciation, it may indicate that the asset is nearing the end of its useful life, and the company may decide to expense the cost of a replacement or upgrade rather than capitalize it. Conversely, if an asset has a low balance in accumulated depreciation, the company may be more inclined to capitalize the cost of a new or improved item, as it will have a longer useful life and can be depreciated over time.
• Analyze the role of accumulated depreciation in determining a company's taxable income and how it can be used to manage the company's tax liability.
  • Accumulated depreciation is a crucial factor in determining a company's taxable income, as it represents the portion of an asset's cost that has been deducted as an expense. By carefully managing the depreciation of its assets, a company can strategically time the recognition of depreciation expenses to minimize its tax liability. For example, a company may choose to accelerate the depreciation of an asset to deduct a larger portion of its cost in the early years, thereby reducing its taxable income in those periods. Conversely, a company may choose to extend the useful life of an asset and depreciate it more slowly, which can help to spread out the tax deductions over a longer period.

Related terms

Depreciation:

The systematic allocation of the cost of a tangible asset over its useful life, recognizing the asset's decline in value over time.

Asset: A resource controlled by a company as a result of past events and from which future economic benefits are expected to flow to the company.

Useful Life:

The period over which an asset is expected to be available for use by a company or the number of production or similar units expected to be obtained from the asset.