How to Account for Accumulated Depreciation

This article is going to identify how to account for accumulated depreciation using different methods. In the organizational point of view, it is so important to know about the ways of accounting for depreciation as there are many fixed assets like buildings, office equipments and machines, furniture which are depreciated over time. Therefore, in the following sections it is expected to elaborate on the useful concepts related with the depreciation.

What is Depreciation?

The initial value of a fixed asset at the time of acquisition decreases with the usage over a specific time period. That value difference can be defined as depreciation. Depreciation can be calculated using various formulas as follows:

• Straight Line Method
• Reducing Balance Method
• Sum of the years’ digits method

Straight Line Method

In this method, equal or constant amount is charged as the depreciation over the estimated useful life of a fixed asset. The depreciation value can be calculated using the below formula:

Depreciation = (Cost – Residual Value) / Useful Life

Reducing Balance Method

The depreciation amount that needs to be charged reduces over a period . The depreciation value can be calculated using the following formula:

Depreciation = (Cost – Accumulated Depreciation) * Depreciation Rate

Sum of the Years Digits Method

The depreciation value is charged concerning the asset’s expected useful life. This method is almost similar to the reducing balance method. Below formula can be used to calculate the value of depreciation.

Depreciation = (Cost – Salvage Value) * Fraction

What is Accumulated Depreciation?

The addition of depreciation (expressed above) which is calculated over a period can be defined as accumulated depreciation. The accumulated depreciation related to a fixed asset increases with time and it is an expense for an organization. 

How to Account for Accumulated Depreciation?

The double entry to account for accumulated depreciation can be illustrated as follows:

According to the above double entry, the accumulated depreciation amount is recorded in the balance sheet by deducting it from the initial price/ cost of the fixed asset and therefore the Accumulated Depreciation account is identified as a contra account.

After disposing of the fixed asset, the double entry can be recorded as follows:

At the time of disposal if the fixed asset is not fully depreciated, the loss will be reduced with the proceeds from the sale of the asset. As an example, XY Company has bought a machine for $100,000 and the estimated useful life  is 10 years. The annual depreciation amount is, $10,000 and the machine will be disposed after 10 years. The accounting records can be illustrated as follows: 

The depreciation of the machine can be recorded as follows:

The disposal of the machine after 10 years, can be recorded as follows: