What Is Accumulated Depreciation?
Accumulated depreciation is the total amount of depreciation expense that has been recorded for a fixed asset since it was put into use. It is a contra-asset account, meaning it reduces the book value of the related asset on the balance sheet.
Why It Matters
Accumulated depreciation helps businesses and investors understand how much value an asset has lost over time. It plays a critical role in calculating an asset’s net book value, which is:
Net Book Value = Original Cost – Accumulated Depreciation
How It’s Calculated
Each year, a company records a depreciation expense based on methods like straight-line or declining balance. Accumulated depreciation is simply the sum of all those past expenses.
For example, if a machine costs $10,000 and depreciates $1,000 per year using straight-line depreciation, after 3 years:
Accumulated Depreciation = $1,000 × 3 = $3,000
Key Points to Remember
- It appears on the balance sheet as a deduction from the gross asset value.
- It never has a negative balance—it only increases or stays the same.
- When an asset is retired or sold, both the asset and its accumulated depreciation are removed from the books.