Accumulated Depreciation

Accumulated depreciation represents the total asset depreciation taken from year to year.

As the name suggests, accumulated depreciation accumulates the total asset depreciation from period to period.

Accumulated depreciation is a contra account on the balance sheet, where it is subtracted from the original cost of the asset to arrive at the asset book value.

During the life of an asset, accumulated depreciation will equal the depreciation base of the asset, or the total cost of the asset less its estimated salvage value.

For example, when Sunny calculated depreciation for the company vehicle using the straight line depreciation method, he first subtracted the salvage value of $1,000 from the original cost of $12,800 to compute the depreciation base of $11,800. Over the life of the asset, the total accumulated depreciation will equal the depreciation base of $11,800 unless the asset is sold or disposed of early.

Depreciation Schedule and Book Value Using the Straight Line Method

Year	Depreciation Expense	Accumulated Depreciation	Book Value
1	$2,360	$2,360	$10,440
2	2,360	4,720	8,080
3	2,360	7,080	5,720
4	2,360	9,440	3,360
5	2,360	11,800	1,000
TOTAL DEPRECIATION	$11,800	–	–

The book value of an asset is the original cost of the asset less its accumulated depreciation.

At the end of year three, for example, total accumulated depreciation equals $7,080, and the book value equals $5,720. The asset and the accumulated depreciation are listed on the balance sheet as follows:

Asset Depreciation and Book Value

Vehicle	12,800
Less accumulated depreciation	(7,080)
Vehicle, net	5,720

Book value rarely equals the market value of an asset

Since asset depreciation is a method of allocating the costs of an asset over its useful life, and not a means of determining the actual value of an asset, the asset book value rarely equals an asset’s actual market value.

While the depreciation expense is a temporary or nominal account reported on the income statement and closed each accounting period, accumulated depreciation is a real or permanent balance sheet account that accumulates the asset depreciation expense from year to year. It is reported on the balance sheet as a contra account to the asset until the asset is disposed of or sold.

The vehicle depreciation expense, accumulated asset depreciation, and the book value of Sunny’s company vehicle are shown each year for the following accounting depreciation methods:

Depreciation Schedules for Three Widely Used Accounting Depreciation Methods

Year	Straight Line Method	Sum of the Years’ Digits	Double Declining Balance
1	$2,360	$3,933	$5,120
2	2,360	3,147	3,072
3	2,360	2,360	1,843
4	2,360	1,573	1,106
5	2,360	787	659 (LIMITED BY SALVAGE VALUE)
TOTAL ASSET DEPRECIATION	$11,800	$11,800	$11,800

Total Accumulated Depreciation

Year	Straight Line Method	Sum of the Years’ Digits	Double Declining Balance
1	$2,360	$3,933	$5,120
2	4,720	7,080	8,192
3	7,080	9,440	10,035
4	9,440	11,013	11,141
5	11,800	11,800	11,800
TOTAL DEPRECIATION	$11,800	$11,800	$11,800

The accounting journal entry at the end of the first year for each of the accounting depreciation methods is entered as:

Vehicle Depreciation Expense, Straight Line Method

Account and Explanation	Debits	Credits
Depreciation Expense	$2,360	–
Accumulated Depreciation	–	$2,360
To record annual depreciation expense of company vehicle.

Vehicle Depreciation Expense, Sum of the Years’ Digits

Account and Explanation	Debits	Credits
Depreciation Expense	$3,933	–
Accumulated Depreciation	–	$3,933
To record annual depreciation expense of company vehicle.

Vehicle Depreciation Expense, Double Declining Balance

Account and Explanation	Debits	Credits
Depreciation Expense	$5,120	–
Accumulated Depreciation	–	$5,120
To record annual depreciation expense of company vehicle.

At the end of year five, the book value equals the salvage value of $1,000 under each method, and the company vehicle is listed on the balance sheet at the original acquisition or historical cost, less the accumulated depreciation amount of $11,800: