Accumulated depreciation is what type of account?
Is it an asset or a liability? Accumulated depreciation is the total amount of depreciation expense that has been associated with an asset since its useful life. It is the total depreciation that is reduced from the value of an asset and recorded on the credit side to offset the balance of the asset.
Accumulated depreciation is not treated as an asset or liability on the statement of condition, rather it is treated as a type of contra account. For the running of business operations, several companies depend on their capital assets such as vehicles, equipment, buildings, and machinery which tend to lose value over time.
In accordance with accounting rules, these companies must record as these assets depreciate over their useful lives. Due to this, they have to recognize accumulated depreciation, as the sum of depreciation expenses recognized over the life of an asset. Hence, on the balance sheet, the accumulated depreciation is reported as a contra asset that reduces the net book value of the capital asset section.
This article aims to answer the question- Accumulated depreciation is what type of account? We will discuss accumulated depreciation as a contra asset account.
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What is accumulated depreciation?
Accumulated depreciation is calculated for long-term capital assets that tend to lose value over time and can be sold for money. Hence, accumulated depreciation is calculated as the sum of depreciation expenses recognized over the life of an asset.
The depreciation expense is expressed as the amount that has been depreciated for a single period while the accumulated depreciation is the total amount of depreciation of the asset. This simply means that accumulated depreciation is the total amount of capital or fixed asset’s cost that has been allocated as depreciation expense from the time that the asset has been used.
As the depreciation expenses are recorded for an asset or group of assets, the amount of accumulated depreciation will increase over time. This is not applicable to current or short-term assets. Accumulated depreciation is therefore not calculated for the current assets that the company frequently buy and replaces.
It is reported on the balance sheet under the asset section, reducing the total value of the capital assets recognized on the financial statement. Hence, accumulated depreciation is reported on the balance sheet, as a contra asset that reduces the net book value of the capital asset section.
Therefore, the value of an asset on the balance sheet is expressed as the cost of the asset minus accumulated depreciation which equals the book value of that asset. Because accumulated depreciation cannot exceed the cost of an asset, it will be reversed when the asset it is associated with is eventually sold or put out of use. Thereby, eliminating all records of the asset from the company’s balance sheet.
Therefore, the carrying value of an asset on the balance sheet is the difference between its historical cost and the accumulated depreciation. The carrying value of the asset on the balance sheet at the end of its useful life will therefore match its salvage value. An asset’s accumulated depreciation is dependent on its salvage value. This salvage value is the amount that a company may expect to receive in exchange for selling an asset at the end of its useful life.
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Accumulated depreciation is what type of account?
Accumulated depreciation as a contra account decreases the value of an asset on the balance sheet over time. It is reported within the asset section of a balance sheet, not as an asset but as a contra asset that reduces the book value of an asset. Because assets have a natural debit balance, accumulated depreciation usually has a natural credit balance.
As a contra asset account, accumulated depreciation has a credit balance, that reduces the gross amount of the fixed asset. It is therefore a reduction from the gross amount of fixed assets reported on the balance sheet. It is a type of contra account because the balances stored in the accumulated depreciation account represent the amount of economic value that has been consumed in the past.
Depreciation, every year, is treated as an expense and debited to the profit and loss account. Hence, accumulated depreciation is separately deducted from the asset’s value and treated as a contra asset that offsets the balance of the asset.
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Accumulated depreciation as a contra asset account
Accumulated depreciation is what type of account? Accumulated depreciation is a contra asset account. Contra asset accounts usually have zero or negative account balances. Nevertheless, they also account for assets equalizing and balancing one another out to attain a net value.
Accumulated depreciation as a contra asset account increases as long-term fixed assets depreciates in value. Companies, thereby, record the accumulated depreciation on their balance sheet which is likely to reduce the company’s gross fixed assets.
A contra account is usually reported on the same financial statement as the associated account. This is why accumulated depreciation is found in the asset section of the balance sheet. Contra accounts are used in a general ledger to reduce the value of the related account when the two are netted together.
Therefore, the natural balance of a contra account is the opposite of the associated account. That is, if the natural balance recorded for the related account is a debit, the contra account will record a credit balance. This is why accumulated depreciation as a contra account has a credit balance since the natural balance for a fixed asset is a debit balance.
The four main types of contra accounts are contra asset, contra liability, contra equity, and contra revenue. Accumulated depreciation and allowance for doubtful accounts are the main contra asset accounts. These contra asset accounts are recorded with a credit balance that decreases the balance of an asset.
Accumulated depreciation as a major contra account reduces the balance of the fixed and capital assets. Therefore, when accounting for assets, the difference between the asset’s account balance and the contra account balance will be the book value.
The essence of using contra accounts is to keep financial accounting records clean. Rather than just reducing the value of the original account directly, accountants make use of these contra accounts. Without using a contra account, it can be difficult to determine historical costs which can make tax preparation more difficult and time-consuming.
For financial reporting purposes, the financial information appears to be more transparent when the original dollar amount is kept intact in the original account and the figure reduced is kept in a separate account. This is why, when a piece of equipment is purchased, say for $20,000, the $20,000 figure is maintained on the general ledger and the asset’s depreciation is recorded separately.
Example
Company XYZ buys a piece of equipment with a useful life of 10 years for $110,000. This equipment is estimated to have a salvage value of $10,000 and is going to provide Company XYZ with value for the next 10 years. Company XYZ expenses the cost of the equipment over the next 10 years and the straight-line depreciation is calculated as:
($110,000 – $10,000) / 10 = $10,000 a year
That is, the company will depreciate $10,000 for the next 10 years until the book value of the asset is $10,000.
Each year, the accumulated depreciation as a contra asset account increases by $10,000. At the end of five years, for instance, the annual depreciation expense remains at $10,000, whereas the accumulated depreciation will grow to $50,000. This shows that accumulated depreciation is a cumulative account.
The accumulated depreciation as a contra asset account is credited each year as the value of the asset is written off and remains on the books. It reduces the net value of the asset until the asset is disposed of or sold.
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Conclusion
In conclusion, accumulated depreciation is not treated as an asset or liability on the statement of condition, rather it is treated as a type of contra account. It is a type of contra account that is recorded as a contra asset account and thereby represents a credit balance since the assets that it reduces are natural debit accounts. It is reported on the balance sheet under the asset section and reduces the total value of assets recognized on the financial statement.
Accumulated depreciation is treated as a contra asset account that contains a negative balance used to offset the asset account. Due to this, it is classified separately from the normal asset or liability account, thus, it is not an asset or liability.
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