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Business Financials – Accumulated Depreciation on the Balance Sheet – How this account works

images/Business Financials3.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) 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.

They are shown together with the Assets at Cost account 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 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. 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 Asset for $7,500. At the end of the current year the credit balance in Accumulated Depreciation will be $32,500.

Start of Year       

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

Accum Deprec                     -$25,000

Total Plant & Equip               $25,000

End of year

Plant & Equip                        $50,000 

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

Total Plant & Equip                $17,500

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