Depreciation expense is recorded on the income statement as an expense or debit, reducing net income. Accumulated depreciation is not recorded separately on the balance sheet.
When you record depreciation on a tangible asset, you debit depreciation expense and credit accumulated depreciation for the same amount. This shows the asset’s accumulated depreciation net book value on the balance sheet and allows you to see how much of an asset has been written off and get an idea of its remaining useful life.
Accumulated Depreciation and the Sale of a Business Asset
As a result, companies must recognize accumulated depreciation, the sum of depreciation expense recognized over the life of an asset. Accumulated depreciation is reported on the balance sheet as a contra asset that reduces the net book value of the capital asset section.
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To calculate net book value, subtract the accumulated depreciation and any impairment charges from the initial purchase price of an asset. After three years, the company records an asset impairment charge of $200,000 against the asset. At that point, the accumulated depreciation for the asset is $300,000. This means that the asset’s net book value is $500,000 (calculated as $1,000,000 purchase price – $200,000 impairment charge – $300,000 accumulated depreciation). After the 5-year period, https://www.bookstime.com/ if the company were to sell the asset, the account would need to be zeroed out because the asset is not relevant to the company anymore. Therefore, there would be a credit to the asset account, a debit to the accumulated depreciation account, and a gain or loss depending on the fair value of the asset and the amount received. Since accelerated depreciation is an accounting method for recognizing depreciation, the result of accelerated depreciation is to book accumulated depreciation.
How Do You Calculate Accumulated Depreciation?
If this derecognition were not completed, a company would gradually build up a large amount of gross fixed asset cost and accumulated depreciation on its balance sheet. Accumulated depreciation is recorded in a contra asset account, meaning it has a credit balance, which reduces the gross amount of the fixed asset.
Is Accumulated depreciation an asset or liability?
For financial reporting purposes, accumulated depreciation is neither an asset or a liability. Instead, it is classified as a contra asset account and is used to reduce an asset's value on the balance sheet to reflect the total amount of wear and tear on that asset to date.