# How to Calculate Accumulated Depreciation | Formula | Example

## Accounting Depreciation

Depreciation is the process of calculating and recording how much asset value has decreased due to usage over time. The fixed assets only last for a certain time frame, so they will become useless at the end of the period. The company needs to allocate the assets cost base on the period and record depreciation expenses. The depreciation should be equal and separate over the period.

It is the process to allocate the fixed assets on the balance sheet to expenses on the income statement.

There are many methods that entities could use to calculate depreciation. But they all serve one purpose, making sure you account for the depreciation expense. The depreciation of an asset is a significant expense that can be difficult to manage.

The depreciation expense is calculated in a different way depending on which accounting method you use. We will discuss two depreciation methods which include:

• Straight Line Method.
• Double Declining Method.

## Accumulated Depreciation

Accumulated depreciation is the sum of all depreciation expenses incurred from the beginning to the reporting date. It is the total depreciation from the assets’ purchase date up to any specific point in time. The company usually started depreciation when the assets are ready for use which is the purchase date or arrival date.

When the assets are ready for use, the company record only the cost on the balance sheet. It shows a single line on the balance sheet.

At the same time, they start to depreciate the fixed assets. They will record depreciation expenses on the income statement. The other side of the transaction will increase the accumulated depreciation on the balance sheet.

The accumulated depreciation is the contra account of fixed assets’ cost. So when a company increase accumulated depreciation, it will reduce the fixed asset’s net book value.

Fixed assets netbook value equal to fixed assets cost plus accumulated depreciation. While accumulated depreciation is the contra account (negative balance), it will reduce the cost.

Account Amount
Cost 1,000
Accumulated Dep (200)
NetBook Value 800

The accumulated depreciation will keep increasing alongside the depreciation expense. However, it cannot be higher than the cost of fixed assets. Otherwise, there is something wrong with the depreciation. The company may record the depreciation even after the end of the assets’ useful life which is not the correct way.

It is a high alert for the management when we see the negative assets’ net book value. It happens when the accumulated depreciation is bigger than the cost of fixed assets.

The fixed assets net book value is sometimes called the carrying amount which is the amount present on the balance sheet. The difference between carrying amounts is it may include the impairment or change in fair value and has an impact on the presented balance.

The accumulated depreciation expenses are the fixed assets contra account. It presents in the fixed assets section on the balance sheet. The contra account is used to record the balance due on loans or accounts receivable. It’s also known as a “net loan”.

## Journal Entry

The accumulated depreciation is recorded alongside the depreciation expense. The purpose of depreciation is to reduce fixed assets balance and increase depreciation expense on the income statement.

However, we cannot reduce the cost of assets directly, we need to record to its contra account which is the accumulated depreciation.

The journal entry is debiting depreciation expense and credit accumulated depreciation.

Account Debit Credit
Depreciation Expense \$\$\$
Accumulated Depreciation Expense \$\$\$

## Example

Company ABC owns a vehicle and the accumulated depreciation balance at the beginning of the year is \$40,000. The cost of this fixed asset is \$ 100,000. The annual depreciation charge for this year will be approximately \$ 10,000 based on the straight-line depreciation method. Please prepare a journal entry for accumulation depreciation.

Company ABC uses the straight-line depreciation method to calculate the depreciation expense. At the beginning of the year, the cost and accumulated the vehicle are:

Account Amount
Cost 100,000
Accumulated Dep (40,000)
Net Book Value 60,000

During the year, company recorded additional depreciation expenses.

The journal entry is debiting depreciation expense of \$ 10,000 and credit accumulated depreciation of \$ 10,000.

Account Debit Credit
Depreciation Expense 10,000
Accumulated Depreciation Expense 10,000

The transaction will increase the depreciation expense on the income statement and increase the accumulated depreciation on the balance sheet.

The cost and accumulated depreciation of the vehicle would be:

Account Amount
Cost 100,000
Accumulated Dep (50,000)
Net Book Value 50,000

If compare both beginning and ending net book value, we can see that it decreases by \$ 10,000. The transaction reduces the asset book value by \$10,000, it is the same as depreciation expense.

## Accumulated Depreciation under Straight-Line Method

Straight-line is the depreciation method the value of assets is reduced equally over the life until they reach the scrap value. It will reach zero if the fixed asset does not have a scrap value.

The company estimates the useful life of the fixed assets and scrap value. Useful life refers to the period of time that fixed assets expect to work and bring future economic benefit to the company. Scrap value is the estimation of assets value at the end of useful life.

Depreciation /period = (Fixed Assets Cost – Scrap Value)/Useful life

It means that depreciation expense will the same over the period of useful life. Each year, the company must record the same depreciation expense until it reaches the end of its useful life.

At the same time, the accumulated depreciation also increases as the liner line. It will keep increasing the same amount over and over till the end of its useful life.

Example

The machinery cost \$ 200,000 and management expects to use it for 10 years. The scrap value of machinery is expected to be \$ 20,000. Please calculate the depreciation using the straight-line method.

Based on the straight-line depreciation, fixed assets value has to allocate over the period of useful life. However, this machinery has scrap value, so we have to exclude it from the calculation. The company expects to receive the scrape value back, so it is not an expense.

Depreciation per year = (200,000 – 20,000)/10 years = \$ 18,000 per year.

The machinery has to depreciate \$ 18,000 per year from year 1 to the end of year 10. Please refer to the following table:

Year Cost Machinery Depreciation Expense Accumulated Dep Net Book Value
1 200,000 18,000 18,000 182,000
2 200,000 18,000 36,000 164,000
3 200,000 18,000 54,000 146,000
4 200,000 18,000 72,000 128,000
5 200,000 18,000 90,000 110,000
6 200,000 18,000 108,000 92,000
7 200,000 18,000 126,000 74,000
8 200,000 18,000 144,000 56,000
9 200,000 18,000 162,000 38,000
10 200,000 18,000 180,000 20,000

At the end of year 10, the netbook value is equal to \$ 20,000 which is the scrap value. The company can dispose of the assets and receive \$ 20,000.

## Accumulated Depreciation under Double Declining

The double Declining depreciation method is the accelerated depreciation that calculates the expense at a higher rate compared to the straight-line method.

It generates a huge depreciation expense in the early period and it keeps reducing significantly over the next period. It is suitable for fixed assets that lose significant value in the early day.

Moreover, this depreciation is used to delay the company’s income tax expense in the future. It reduces the company income tax at the beginning day and increases it later.

To calculate the double decline depreciation by follow the following steps:

• Determine Assets Book value
• Determine Useful life
• Calculate the Annual Depreciation rate
• Double the annual depreciation
• Calculate the year-end period value

For example,

The machinery is \$ 100,000 and management estimate useful life of 5 years. They are using the double-declining depreciation method. Please calculate.

• The assets book value is \$ 100,000 as the asset has no scrap value
• Useful life is 5 years
• The annual depreciation rate is 20% (100%/5years), and the double rate is 40%
• Annual depreciation equal to \$ 20,000 (\$100,000 * 20%), so the double depreciation is \$ 40,000
• For the next period please refer to the table
Year Beg Book value Depreciation Expense Accumulated Dep Ending Book Value
1 100,000 40,000 40,000 60,000
2 60,000 24,000 64,000 36,000
3 36,000 14,400 78,400 21,600
4 21,600 8,6400 87,040 12,960
5 12,960 12,960 100,000 0