Definition | Explanation | Examples | Journal Entry | Financial Statements

What is Accumulated Depreciation?

Accumulated depreciation is a contra asset account with a credit balance that records the cumulative reduction in the value of capital assets incurred to date due to age and use in order to offset the gross amount of fixed assets and report their book value on a balance sheet.
  • Capital Asset accounts hold the original acquisition cost of long-term fixed assets like buildings, equipment and vehicles.
  • Accumulated Depreciation contra accounts contain the sum total of the cumulative depreciation expenses that have been charged against a company’s non-current assets over time to reduce their value due to passage of time and use.
  • In combination, the asset and contra-asset accounts show the net current value (also known as book value or carrying amount) of fixed assets on a company’s balance sheet (= original cost – depreciation).

Why is Accumulated Depreciation used?

Accumulated Depreciation asset contra accounts are reported separately on a balance sheet to provide the users of financial statements with a better insight into a company’s financials than if the assets were reported solely at their net amounts by making it clear what proportion of assets was depreciated compared to their remaining useful life and value.

Accounting for Accumulated Depreciation

Debit or Credit?

Accumulated Depreciation is a contra asset account that normally has a credit balance and is credited when increased, which is the exact opposite of its parent Asset account that normally has a debit balance and is debited when increased.

Accumulated Depreciation: Debit or Credit?
Account Name Account Type Debit Credit
Fixed Assets Asset Increase Decrease
Accumulated Depreciation Contra-Asset Decrease Increase

Other examples of asset contra accounts include:

List of Contra-Asset Accounts
Contra Account Parent Account
Allowance for Doubtful Accounts - Provision for Bad Debts Accounts Receivable
Discount on Notes Receivable Notes Receivable
Reserve for Obsolete, Unsold and Unusable Inventory Inventory
Accumulated Depreciation Property, Plant and Equipment - Long-Term Fixed Assets

Journal Entry

A depreciation journal entry records the current depreciation amount as a debit to a Depreciation expense account and a credit to an Accumulated Depreciation contra-asset account.

Accumulated Depreciation: Journal Entry
Account Name Account Type Debit Credit
Depreciation Expense $$$
Accumulated Depreciation Contra-Asset $$$

What is the difference between Accumulated Depreciation vs. Depreciation Expense?

Depreciation Expense is an expense account with a debit balance that records the amount of depreciation for one single accounting period, whereas Accumulated Depreciation is a contra asset account with a credit balance that carries the total cumulative amount of asset depreciation charged to date.

4 Differences: Depreciation Expense vs. Accumulated Depreciation
Account Name Account Type Dr/Cr Financial Statement Explanation
Depreciation Expense Expense Debit Income Statement Amount of depreciation charged for one accounting period
Accumulated Depreciation Contra-Asset Credit Balance Sheet Total cumulative amount of depreciation charged to date

Financial Statements

The Depreciation expense is presented on an income statement as an operating expense and the Accumulated Depreciation contra asset account is captured on a balance sheet under capital assets, as a deduction from Property, Plant and Equipment non-current fixed assets.

Accumulated Depreciation: Financial Reporting
Account Name Financial Statement Section Sub-Section
Depreciation Expense Income Statement Expenses Operating Expenses
Accumulated Depreciation Balance Sheet Assets Long-term Assets (Non-current Fixed Assets) >> PP&E (Property, Plant and Equipment)

Disposal

If an asset is sold or reaches the end of its useful life, the total amount of depreciation that has accumulated in the contra-asset over time is reversed.

Disposal of a Fixed Asset - Accumulated Depreciation: Journal Entry
Account Name Account Type Debit Credit
Accumulated Depreciation Contra-Asset $$$
Fixed Asset Asset $$$

Practical Example

Accumulated Depreciation in General Ledger and Financial Statements

Question

At the beginning of the year, Company A purchases a new van for $20,000. Company A estimates that the vehicle’s useful life is 10 years with no residual value.

At the end of the year, Company A uses the straight-line method to calculate the depreciation for the van, arriving at an annual expense of $2,000 ($20,000 purchase price / 10 years of useful life).

1. What will Company A’s depreciation journal entries look like in Year 1 and Year 10?

2. How will the depreciation be reflected in the company’s financial statements in Year 1?

Answer

In the general ledger, Company A will record the depreciation amount for the current year as a debit to a Depreciation expense account and a credit to an Accumulated Depreciation contra-asset account.  

The accumulated depreciation of the van will increase by $2,000 for each year of its useful life.

General Ledger: Company A – 31 December 20XX
Account Name Account Type Debit Credit
Depreciation Expense Expense $2,000
Accumulated Depreciation Contra-Asset $2,000

On the balance sheet, Company A’s accumulated depreciation will increase by $2,000 every year to reduce the net current book value of its long-term assets, which is calculated as the total accumulated depreciation value for the time period subtracted from the initial purchase price (historical cost of acquisition).

Consequently, the net value of the van will amount to 0 at the end of its useful life in 10 years.

In Year 1, the van asset account will have a debit balance of $20,000 and the Accumulated Depreciation contra will show a credit balance of $2,000, resulting in the van’s book value (current value or carrying amount) of $18,000.

Balance Sheet: Company A – 31 December 20XX
Non-Current Assets: Vehicles Parent Asset $20,000
(Less: Accumulated Depreciation) Contra-Asset ($2,000)
Net Non-Current Assets Current Book Value $18,000

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