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Business Financials – The Accumulated Depreciation Asset Account on the Balance Sheet

images/Business Financials2.jpgThe Accumulated Depreciation account is found in the assets on the company’s balance sheet and reports the amount of an asset’s cost that has been depreciated (written off to claim as an expense against profit) up to the date of the balance sheet.

The asset’s original cost is recorded in another asset account eg Motor Vehicle at Cost, Office Equipment at Cost, Plant and Equipment at Cost.

The Assets at Cost account is debited when assets are posted there and the Accumulated Depreciation is credited each time that depreciation expense is debited (usually for small business depreciation is calculated at year end by the accountant). Since Accumulated Depreciation will have a continually increasing credit balance it is also referred to as a contra asset account.

As an example let’s say that at the beginning of the current year a company’s asset account Plant & Equipment has a balance of $50,000 which will be the at-cost amount (net GST) from the previous year.

From the time of purchase until the beginning of the current year the related Accumulated Depreciation account has accumulated a credit balance of $25,000 over the past 3 years. The Balance Sheet will also report the net of $50,000 less $25,000 leaving a Plant & Equip balance of $25,000 which will be used to calculate the next depreciation allowable. 

Start of Year       

Plant & Equip                       $50,000 is constant unless more equip purchased

Accum Deprec                    -$25,000

Total Plant & Equip             $25,000 (Net)

Now at the end of the next current year the company debits Depreciation Expense (let’s assume the rate is 30% which gives $7,500 of the $25,000) and credits the Accumulated Depreciation Asset for $7,500. At the end of the current year the credit balance in

Accumulated Depreciation will be $32,500.

End of year

Plant & Equip                       $50,000

Accum Deprec                    -$32,500     has -$25,000 plus -$7,500 Credit (if that is the depreciation calculated)

Total Plant & Equip             $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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