Definition
Accumulated depreciation is the total depreciation charged on a fixed asset since it was acquired. It is a contra asset account with a credit balance, so the asset stays at its original cost while the balance sheet shows the net carrying amount: cost minus accumulated depreciation. It is removed when the asset is sold or scrapped.
How it works
Each period an adjusting entry debits depreciation expense and credits accumulated depreciation. Over the asset's useful life, the accumulated balance grows until cost minus accumulated depreciation equals the residual value.
Keeping cost and accumulated depreciation separate shows how much of the asset base has been used up, which is useful for planning replacements. A fleet with 90% of its cost depreciated is due for renewal soon.
When an asset is disposed of, both its cost and its accumulated depreciation are removed, and any difference from the sale proceeds is a gain or loss. Use the depreciation calculator to build the schedule.
Formula
Carrying amount = Cost - Accumulated depreciation
Annual straight-line depreciation = (Cost - Residual value) / Useful life
Example: a van over three years
A van costs 30,000, has a 5-year life and a 5,000 residual value. Straight-line depreciation is 5,000 a year.
| Year end | Depreciation | Accumulated depreciation | Carrying amount |
|---|---|---|---|
| Year 1 | 5,000 | 5,000 | 25,000 |
| Year 2 | 5,000 | 10,000 | 20,000 |
| Year 3 | 5,000 | 15,000 | 15,000 |