What Is Accumulated Depreciation?

Definition and Example of Accumulated Depreciation

Small businesses have fixed assets that can be depreciated such as equipment, tools, and vehicles. For each of these assets, accumulated depreciation is the total depreciation for that asset up to and including the current accounting period. 

As an example of accumulated depreciation, let’s say that a company purchased a piece of machinery that it must have for its production process. That machinery costs $100,000 and is expected to be in service for ten years. First, you calculate the depreciation of that asset for the first year it is in service. If you’re using the straight-line depreciation method—meaning taking the same amount of depreciation in each year of the asset's useful life—and there is no salvage value, then the depreciation calculation is:

Depreciation = Cost of the Asset ➗ Number of Years in Service

In this case, depreciation would be $100,000 ➗ 10 = $10,000 per year

For accumulated depreciation, the formula is:

Accumulated Depreciation = (Cost of the Asset - Salvage Value) ➗ Life of the Asset * Number of Years

We already know the depreciation for each year is $10,000, and there is no salvage value. So, the accumulated depreciation for year 1 is $10,000. Using the formula for accumulated depreciation, the calculation for year 2 with the values filled in is:

Accumulated Depreciation = ($100,000 - $0) ÷ 10 * 2 = $20,000

How Accumulated Depreciation Works 

Accumulated depreciation is a direct result of the accounting concept of depreciation. Depreciation is expensing the cost of an asset that produces revenue during its useful life. Buildings, machinery, furniture, and fixtures wear out, computers and technology devices become obsolete, and they are expensed as their value approaches zero. Accumulated depreciation is the total value of the asset that is expensed.

A fixed asset, however, is not treated as an expense when it is purchased. The full value of the asset is shown on the company’s balance sheet. Over its useful life, the asset’s cost becomes an expense as it declines in value year after year. The declining value of the asset on the balance sheet is reflected on the income statement as a depreciation expense. Accumulated depreciation is a credit balance on the balance sheet, otherwise known as a contra account. It is the total amount of an asset that is expensed on the income statement over its useful life. 

On the income statement, meanwhile, accumulated depreciation is an expense that reduces a business’s revenue and leaves it with a lower tax liability even though there is not a cash payment associated with accumulated depreciation. It is known as a non-cash expense. 

According to the Generally Accepted Accounting Principles (GAAP), each expense must be recognized under the rules of accrual accounting—whether they are cash or noncash—if they are involved in the production of revenue.

Journal Entry for Accumulated Depreciation

Most businesses have more than one asset to depreciate. Here is a sample accounting journal entry in the case of multiple assets:

Expanded Example and Table

In the example above, we used this formula for accumulated depreciation: 

Accumulated Depreciation = (Cost of the Asset - Salvage Value) ➗ Life of the Asset * Number of Years

This was our calculation: 

Accumulated Depreciation = ($100,000 - $0) ÷ 10 * 2 = $20,000

Now, let’s add in salvage value. The salvage value is what the asset is thought to be worth once it is fully depreciated. Let’s say the salvage value in this example is $5,000, so the formula for accumulated depreciation becomes:

Accumulated Depreciation = ($100,000 - $5,000) ÷ 10 = $9,500 

The accumulated depreciation for Year 1 of the asset’s ten-year life is $9,500. Since we are using straight-line depreciation, $9,500 will be the depreciation for each year. However, the accumulated depreciation is shown in the following table since it is the sum of the asset’s depreciation.

For each of the ten years of the useful life of the asset, depreciation will be the same since we are using straight-line depreciation. However, accumulated depreciation increases by that amount until the asset is fully depreciated in year ten. Then, there is $5,000 left since that is the salvage value.