How to Calculate Accumulated Depreciation? (Explained)

Accounting Depreciation:

The decrease in the value of a fixed asset due to its usage over time is called depreciation. There are many depreciation methods that the entities could use.

Still, in the article, we will discuss two depreciation methods that are normally used to calculate depreciation for the entity fixed assets and how accumulated depreciation is related to the depreciation.

We will also discuss how the accumulated depreciation is calculated for these two methods.

Accumulated Depreciation:

Accumulated depreciation is the sum of depreciation expenses over the years. The carrying amount of fixed assets in the balance sheet is the difference between the asset’s cost and the total accumulated depreciation and impairment.

Accumulated depreciation is calculated by subtracting the estimated scrap/salvage value at the end of its useful life from the initial cost of an asset.

And then divided by the number of the estimated useful life of an asset. In other ways, accumulated depreciation is calculated by the sum of all of the depreciation charges to assets from the beginning up to the latest reporting period.

In trial balance, the accumulated depreciation expenses are the contra account of the fixed assets accounts.

If you are also familiar with provisions for loans or accounts receivable, these are also the contra account of loans or receivables so that the loan or AR will be reported at the net in the balance sheet.

Fixed assets also do the same things; they are reported at the net of accumulated depreciation in the balance sheet at the end of the specific date.

Journal entries:

The recording of journal entries of accumulated depreciation is linked with the recording of depreciation expenses, and the entries are credited to the accumulated depreciation account, which is the contra entry of the fixed asset account, and debited to the depreciation expenses account, which is under the income statement account.

AccountDescriptionDrCr
XXXXAccumulated depreciationUSD #,### 
XXXXDepreciation expenses USD #,###

See the example of accumulated depreciation expenses below:

let’s say the opening balance of accumulated depreciation on the 1st Jan 2019 is USD400,000 and the depreciation charge in the year 2019 is USD40,000, then the entries are as follows:

Dr_Depreciation expenses 40,000 (P&L)

Cr_Accumulated depreciation 40,000 (BS)

Total accumulated depreciation expenses at the end of 31 December 2019 is USD 440,000.

Accumulated depreciation on 31 December 2019 is equal to the opening balance amount of USD400,000 plus depreciation charge during the year amount of USD40,000.

Now, let’s discuss how to calculate accumulated depreciation.

For example, we have fixed assets A and B with USD 500,000 and USD400,000, respectively, and useful life of 10 and 20 years.

Description Date of Purchase In (Rs.) Cost In (Rs.) Scrap Value In (Rs.) Useful life In (Years) Method
A Jan 1st, 2002 500,000 100,000 10 Straight Line
B July 1st , 2002 400,000 80,000 20 Diminishing

Now, the depreciation formula for the straight-line method will be:

Depreciation Expense = (Cost of Asset – Scrap value) / Useful life time.

                                        = (500,000 – 100,000) / 10

Note: Cost of Assets – Scrap Value is equal to 400,000, known as depreciable cost or depreciable value. It means that we cannot charge depreciation on scrap value (100,000), which is assumed the asset’s cost after its useful life ends.

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So,         

Depreciation expense = 400,000 / 10

= 40,000 p/year.

Accumulated depreciation will be determined by summing up all the depreciation expenses up to the date of reporting.

Let’s suppose the company’s financial year ends on June 30th of each year. Therefore, we cannot charge the depreciation for a whole in the Income Statement of the Financial Year 2002-2003 because machine A has been used for six months this year.

Therefore, we will divide the annual depreciation expense by 12 and multiply it by the number of months in which it is used. i. e

                Depreciation Expense = (40,000 * 6) / 12

                                                   = 20,000 (depreciation for 6 months)

Accumulated Schedule Using Straight Line Method:

This calculation will be for the first and last year of Asset A. Now the depreciation expenses and accumulated depreciation will be looks like this:

S.No Accounting Period Cost of Asset Depreciation Accumulated Depreciation Current Value
1 2003 500,000 20,000 20,000 480,000
2 2004 480,000 40,000 60,000 440,000
3 2005 440,000 40,000 100,000 400,000
4 2006 400,000 40,000 140,000 360,000
5 2007 360,000 40,000 180,000 320,000
6 2008 320,000 40,000 220,000 280,000
7 2009 280,000 40,000 260,000 240,000
8 2010 240,000 40,000 300,000 200,000
9 2011 200,000 40,000 340,000 160,000
10 2012 160,000 40,000 380,000 120,000
11 2013 120,000 20,000 400,000 100,000

Accumulated Depreciation Schedule Using Declining Method:

Now, let’s calculate the depreciation expense for Asset B by using the Diminishing or Declining Method.

In this method, we apply a percentage on face value to calculate the Depreciation Expenses during the first year of its useful life.

For the next of years, we apply the same percentage on the booked of written down value of the asset, but the value of the percentage is not given in the data we have. But we can calculate it with the help of the following formula.

Rate of Depreciation = 1 – (Scrap value / cost value)1/n

                                   = 1 (80,000 / 400,000)1/20

                                   = 7.73    when rounded = 8%

Noted: (n = number of years)

Now, For Asset B, the calculation of the depreciation expense table will be as follows.

Financial Year Cost Value %age Depreciation Expense for the period Accumulated Depreciation Exp Written Down Value of the Asset= (cost – Dep)
2003 400,000 8 32,000 32,000 368,000
2004 368,000 8 29,440 61,440 338,560
2005 338,560 8 27,085 88,525 311,475
2006 311,475 8 24,918 113,443 286,557
2007 286,557 8 22,925 136,367 263,633
2008 263,633 8 21,091 157,458 242,542
2009 242,542 8 19,403 176,861 223,139
2010 223,139 8 17,851 194,712 205,288
2011 205,288 8 16,423 211,135 188,865
2012 188,865 8 15,109 226,245 173,755
2013 173,755 8 13,900 240,145 159,855
2014 159,855 8 12,788 252,933 147,067
2015 147,067 8 11,765 264,699 135,301
2016 135,301 8 10,824 275,523 124,477
2017 124,477 8 9,958 285,481 114,519
2018 114,519 8 9,162 294,643 105,357
2019 105,357 8 8,429 303,071 96,929
2020 96,929 8 7,754 310,825 89,175
2021 89,175 8 7,134 317,959 82,041
2022 82,041 8 6,563 324,523 75,477
           

Total accumulated depreciation at the end of the period is not generally reported in the face of financial statements. You can only see the net of fixed assets.

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However, you could see how much is the costs of fixed assets, fixed assets addition during the year or period, depreciation expenses charged during the year, and the total accumulated depreciation up to the end of the reporting period in the notes to financial statements.

It is important to note how accumulated depreciation expenses are not charged due to the changing of the depreciation method.

The method of formula used to calculate depreciation is

Opening balance of accumulated depreciation USD XXX

Add

Depreciation expenses charge during the year/period USD XXX

If there is no opening of accumulated depreciation, then the ending balance is equal to the amount charged during the year.

The Purpose of Calculating Accumulated Depreciation

Calculating accumulated Depreciation plays a crucial role in businesses’ financial reporting and decision-making processes. 

By understanding the purpose behind this calculation, businesses can effectively assess the book value of assets, determine gains or losses on asset sales, claim tax deductions, gain insights into asset age and condition, and make informed decisions regarding asset replacement. 

This review will delve into the various purposes of calculating accumulated Depreciation and highlight their significance.

Determining the Book Value of an Asset: 

One primary purpose of calculating accumulated Depreciation is to determine an asset’s book value. 

The book value represents the remaining value of an asset after accounting for accumulated Depreciation. 

This information is vital for financial reporting and making decisions regarding asset replacement. 

It provides a realistic representation of the asset’s worth in the company’s financial statements.

Calculating Gain or Loss on Asset Sale: 

When an asset is sold, calculating the gain or loss on the sale relies on accumulated Depreciation. 

By subtracting the book value, determined by deducting accumulated Depreciation from the asset’s cost, businesses can accurately assess the financial outcome of the sale. 

This calculation aids in evaluating the financial impact of asset transactions and assists in strategic decision-making.

Determining Depreciation Expense for Tax Purposes:

Accumulated Depreciation is instrumental in determining the depreciation expense that can be claimed for tax purposes. 

Tax deductions are typically based on the accumulated Depreciation recorded for an asset. 

This enables businesses to claim tax benefits for their assets’ wear and tear or obsolescence, aligning tax liabilities with the actual decrease in asset value over time.

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Providing Information on Asset Age and Condition:

Accumulated Depreciation is a valuable information source regarding an asset’s age and condition. 

Assets with high accumulated Depreciation indicate they have been in service for a considerable period and may be approaching the end of their useful lives. 

This insight helps businesses assess the need for repairs, maintenance, or potential replacements, ensuring optimal asset management.

Assisting in Asset Replacement Decisions:

The accumulated Depreciation of an asset is essential in making informed decisions regarding asset replacement. 

Businesses can evaluate replacement cost-effectiveness by analyzing the accumulated Depreciation and comparing it to the cost of acquiring a new asset. 

This analysis enables businesses to make strategic choices that optimize efficiency and mitigate the risks associated with aging or obsolete assets.

Does accumulated depreciation present in the statement of cash flow?

Accumulated Depreciation does not appear directly in the statement of cash flows. 

The statement of cash flows focuses on a company’s cash inflows and outflows during a specific period, categorizing them into three main sections: operating, investing, and financing.

Accumulated Depreciation, on the other hand, is an accounting concept that represents the cumulative depreciation expense recorded over the life of an asset. 

It is reported on the balance sheet as a contra-asset account, reducing the value of the corresponding asset.

Depreciation expense, which contributes to the accumulation of Depreciation, is included in the operating activities section of the statement of cash flows as a non-cash expense. 

This is because Depreciation is a non-cash transaction that reflects an asset’s cost allocation over its useful life.

Does accumulated depreciation present in the income statement?

Accumulated Depreciation does not directly appear in the income statement. 

The income statement, also known as the profit and loss statement or statement of comprehensive income, provides information about a company’s revenues, expenses, gains, and losses during a specific period, resulting in its net income or net loss.

Accumulated Depreciation is not considered an expense that affects the determination of net income. 

Instead, it is a contra-asset account that reflects the total depreciation expense recognized over the life of an asset. 

It is presented on the balance sheet, typically as a deduction from the corresponding asset.

Depreciation expense, which contributes to the accumulation of Depreciation in the accumulated depreciation account, is included in the income statement as a separate line item under operating expenses. 

Depreciation is a non-cash expense representing allocating an asset’s cost over its useful life. 

By recognizing depreciation expense, the income statement reflects the reduction in the value of the company’s assets due to their usage and the passage of time.

Does accumulated depreciation report on the statement of change in equity?

Accumulated Depreciation is not reported on the statement of changes in equity. 

The statement of changes in equity, also known as the statement of retained earnings or statement of shareholders’ equity, provides information about the changes in a company’s equity accounts over a specific period.

Is Accumulated Depreciation An Asset, Liability, Equity, income, or expenses

Accumulated Depreciation is not classified as an asset, liability, equity, income, or expense. 

Instead, it is a contra-asset account subtracted from the corresponding asset on the balance sheet.

In accounting, assets are resources owned by a company with economic value, such as cash, inventory, or property. 

Liabilities represent obligations or debts a company owes, such as loans or accounts payable. 

Equity represents the ownership interest in a company and is calculated as assets minus liabilities. 

Income refers to the company’s revenue or earnings generated from its operations, while expenses are the costs incurred by the company in its operations.

Accumulated Depreciation, on the other hand, is a running total of the depreciation expense recorded on long-term tangible assets, such as buildings, equipment, or vehicles. 

It is deducted from the corresponding asset’s carrying value on the balance sheet. 

The purpose of accumulated Depreciation is to reflect the reduction in the value of these assets over time due to wear and tear, obsolescence, or other factors.

While it impacts the net book value of an asset, accumulated Depreciation is not classified within the traditional categories of assets, liabilities, equity, income, or expenses. 

It is a separate contra-asset account that offsets the original cost of the related asset on the balance sheet.