Accumulated depreciation balance sheet or income statement

Total depreciation over an asset's life

Table of Contents Show

• What is Accumulated Depreciation?
• Video Explanation of Accumulated Depreciation
• Download the Free Template
• Debiting Accumulated Depreciation
• Accumulated Amortization/Depletion
• Related Readings
• Where is Depreciation Tracked?
• Why Depreciation and Balance Sheet Over Other Places?
• Where is accumulated depreciation in income statement?
• Is depreciation an income statement?

What is Accumulated Depreciation?

Accumulated depreciation is the total amount of depreciation expense allocated to a specific asset since the asset was put into use. It is a contra-asset account – a negative asset account that offsets the balance in the asset account it is normally associated with.

Unlike a normal asset account, a credit to a contra-asset account increases its value while a debit decreases its value. Whenever depreciation expense is recorded for an organization, the same amount is also credited to the accumulated depreciation account, allowing the company to show both the cost of the asset and  total-to-date depreciation of the asset. This also shows the asset’s net book value on the balance sheet.

Financial analysts will create a depreciation schedule when performing financial modeling to track the total depreciation over an asset’s life.

Video Explanation of Accumulated Depreciation

Watch this short video to quickly understand the main concepts covered in this guide, including what accumulated depreciation is and how depreciation expenses are calculated.

Example

XYZ Company purchased equipment on January 1, 2015 for $100,000. The equipment has a residual value of $20,000 and has an expected useful life of 8 years. On December 31, 2017, what is the balance of the accumulated depreciation account?

($100,000 – $20,000) / 8 = $10,000 in depreciation expense per year

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Debiting Accumulated Depreciation

We credit the accumulated depreciation account because, as time passes, the company records the depreciation expense that is accumulated in the contra-asset account. However, there are situations when the accumulated depreciation account is debited or eliminated. For example, let’s say an asset has been used for 5 years and has an accumulated depreciation of $100,000 in total.

After the 5-year period, if the company were to sell the asset, the account would need to be zeroed out because the asset is not relevant to the company anymore. Therefore, there would be a credit to the asset account, a debit to the accumulated depreciation account, and a gain or loss depending on the fair value of the asset and the amount received.

Accumulated Amortization/Depletion

Accumulated amortization and accumulated depletion work in the same way as accumulated depreciation; they are all contra-asset accounts. The naming convention is just different depending on the nature of the asset. For tangible assets such as property or plant and equipment, it is referred to as depreciation.

For intangible assets such as patents, licenses, or trademarks, it is referred to as amortization, and for natural resources-related assets such as mines or oil platforms, depletion is the official terminology. When amortization or depletion expense is recorded for the year, the corresponding accumulated contra-asset accounts are credited in order to account for the expense.

Related Readings

Thank you for reading CFI’s guide to Accumulated Depreciation. CFI offers a wealth of free resources on financial analysis and accounting, including the following:

• Depreciation Expense
• Depreciation Schedule
• Projecting Income Statement Line Items
• Income Statement Template

Depreciation is part of tracking assets. Integrating depreciation and balance sheet accounting will help you take your asset tracking game to the next level.

Instead of keeping asset depreciation value a mystery, take more time to see how your assets are aging. If your accounting department isn’t already keeping an eye on depreciation, it’s time to make it part of their job.

Where is Depreciation Tracked?

Depreciation is typically tracked one of two places: on an income statement or balance sheet.

For income statements, depreciation is listed as an expense. It accounts for depreciation charged to expense for the income reporting period.

On the other hand, when it’s listed on the balance sheet, it accounts for total depreciation instead of simply what happened during the expense period. Your balance sheet will record depreciation for all of your fixed assets. This means you’ll see more overall depreciation on your balance sheet than you will on an income statement.

Here’s the difference. Let’s say you acquire a large piece of equipment that cost you $120,000. It has a useful life of five years, which means it depreciates at $2,000 a month.

You’re looking at your company’s income statement for July of the third year you’ve had this machine. For the month of July, this equipment’s depreciation expense is $2,000. However, your balance sheet will show an accumulated depreciation value of $60,000, since that is what has added up in the 30 months you’ve had this asset.

Why Depreciation and Balance Sheet Over Other Places?

Tracking depreciation and balance sheet together helps you get a complete picture of how your assets are depreciating. You can see what’s happening in a month to help you make sure you bring in the right amount of income during that time period by only looking at income statements.

However, if you want to get ahead of your competition, you need to focus on the overall picture. Knowing where your assets will be valued a year from now will help you determine your business worth. Seeing your company’s net value decline over time is a great motivator for making profit generating aspects of your business more of a priority. It’ll also help you identify any assets that are depreciating too quickly, or that are holding up more than you expected.

Having an overall picture of your asset situation will also help you identify which items need maintenance and which ones aren’t worth holding onto anymore. If you see that some assets have outlived their expected lifespan and are costing you thousands in upkeep, it’s time to trash it for something that will be worth the effort.

Your company’s balance sheet is a great place to monitor the overall status of your assets and ventures. Keeping it all in the same place helps you identify patterns that would be harder to spot otherwise. If you see that the estimated depreciation is lower than what is currently happening, you can investigate possible causes and fix them before they get too out of hand. Preventing major problems will save you thousands of dollars and stop crises from hurting your business.

Asset Panda understands that the financial side of your business can get extremely complicated. Trying to manage all of the aspects that affect your profits can quickly become overwhelming if you don’t have a system to manage them. We created our software platform to help you simplify everything related to your assets, so you can put your attention on the more complicated aspects of your company.

Where is accumulated depreciation in income statement?

Is depreciation an income statement?