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Business Financials – What is the Accumulated Depreciation account and what is it doing in the assets?

images/Accumulated Depreciation.jpegThe Accumulated Depreciation account is one account on a company’s balance sheet reports the amount of an asset’s cost that has been depreciated (written down and claimed as depreciation expense) as of the date of the Balance Sheet. The original cost of the asset is recorded in the asset account. Some examples of the common asset accounts Motor Vehicle at Cost, Office Equipment at Cost, Plant and Equipment at Cost. They are shown by having the Assets at Cost account which is debited when assets are bought (and posted there) and the Accumulated Depreciation is credited each time that Depreciation Expense is debited (usually calculated at year end by the accountant).

Since Accumulated Depreciation will have a continually increasing credit balance it is referred to as a contra asset account. The increase is usually done at year end when the accountant calculates the amount that can be claimed, and you should adjust the Accumulated Depreciation by the amount calculated.

As an example let’s say that during earlier years, a company purchases an equipment asset (which is recorded as credit bank and debit asset account Plant & Equipment) and starts with the cost - a balance of $70,000 which is the at-cost amount (after GST). From the time of purchase until the beginning of the current year the related Accumulated Depreciation account has accumulated a credit balance of $45,000 (which is a percent each year of the original purchase cost adding on each year). The Balance Sheet will also report the net of $70,000 less $45,000 leaving a Plant & Equip balance of $25,000 which will be used to calculate the next depreciation allowable.  So at the end of the current year the company debits Depreciation Expense for $7,500 (if that is the calculation at 30%) and credits Accumulated Depreciation for $7,500. At the end of the current year the credit balance in Accumulated Depreciation will be then become $52,500.

Start of Year       

Plant & Equip                       $70,000 is constant unless more equip purchased

Accum Deprec                     -$45,000 grows after each year

Total Plant & Equip net       $25,000

End of year

Plant & Equip                       $70,000

Accum Deprec                     -$52,500                has $45,000 plus $7,500 (if that is the depreciation calculated this year)

Total Plant & Equip net       $17,500

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Accounting Software Australia, MYOB, Quickbooks, accounts software, bookkeeping software
Accounting Software Australia, MYOB, Quickbooks, accounts software, bookkeeping software
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