Accumulated Depreciation – What is it?

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Accumulated Depreciation cover

Accumulated depreciation is a way to track how much an asset’s value decreases over time until it reaches the end of its useful life. You can figure this out using one of six different methods: straight line, declining balance, double-declining balance, sum-of-the-years’ digits, units of production, or half-year recognition.

When you buy an asset for your business, it starts with a certain market value. As time goes by or as you use it, that value goes down. This process is known as depreciation, which is basically the opposite of appreciation, where something gains value.

Companies can write off this decrease in value throughout the life of the item. Some assets that typically depreciate include:

  • Vehicles
  • Furniture
  • Computers
  • Equipment

You can find the total accumulated depreciation listed on a company’s balance sheet, right under the section for the related capitalized assets.

Calculate Accumulated Depreciation

There are six recognized ways to calculate depreciation that are permitted by generally accepted accounting principles (GAAP). A company can choose from these options:

  • Straight line
  • Declining balance
  • Double-declining balance
  • Sum-of-the-years’ digits
  • Units of production
  • Half-year recognition

Straight Line Method

AAD=(Asset Value−Salvage Value)÷ULY
where:
AAD=Annual Accumulated Depreciation
ULY=Useful Life in Years

Declining Balance Method

AAD=Current Book Value× DR
where:
AAD=Annual Accumulated Depreciation
DR=Depreciation Rate

Double-Declining Balance Method – Accumulated Depreciation

D-DBMR=(100%÷ULY)×2
D-DBM=Depreciable Amount×D-DBMR
where:
D-DBMR=Double-Declining Balance Method Rate
ULY=Useful Life in Years
D-DBM=Double-Declining Balance Method

Sum-of-the-Years’ Digits Method

AAD=Depreciable Base×(IYN)÷SYD
where:
AAD=Annual Accumulated Depreciation
IYN=Inverse Year Number
SYD=Sum of Year Digits

Units of Production Method

AAD=(NUC÷TUTBC)×Depreciable Base
where:
AAD=Annual Accumulated Depreciation
NUC=Number of Units Consumed
TUTBC=Total Units To Be Consumed

Half-year recognition – Accumulated Depreciation

One popular approach to partially depreciating an asset is to account for half a year of depreciation in the year you buy it and another half year in the final year of its useful life. This method helps to evenly spread out the depreciation expense and accumulated depreciation during the years when the asset is only in use for part of the year.

Conclusion

A lot of businesses depend on capital assets like buildings, vehicles, equipment, and machinery to run their operations. According to accounting standards, these assets need to be depreciated over their useful lives.

This means that companies have to account for it, which is the total depreciation expense recorded throughout an asset’s life. You’ll find accumulated depreciation listed on the balance sheet as a contra asset, which lowers the net book value of the capital asset section.