How to Account For Accumulated Depreciation

Accumulated depreciation is a contra-asset account used in accounting to reduce the value of an asset on the balance sheet. It represents the total amount of depreciation expense that has been recognized on an asset since it was acquired. To account for accumulated depreciation, you should follow these steps:

1. Determine the cost of the asset: The cost of the asset is the amount paid for it, including any additional costs incurred to bring it to its present condition, such as installation, delivery, and legal fees.

2. Calculate the depreciation expense: Depreciation is the process of allocating the cost of the asset over its useful life. There are different methods of calculating depreciation, such as straight-line, declining balance, and units of production.

3. Record the depreciation expense: The depreciation expense should be recorded in the income statement as an operating expense, reducing the net income for the period.

4. Accumulate the depreciation: The accumulated depreciation account is a contra-asset account, which means it has a credit balance that offsets the debit balance of the asset account. The accumulated depreciation account is used to keep track of the total amount of depreciation recognized on the asset over time.

5. Update the book value of the asset: The book value of the asset is the difference between its cost and accumulated depreciation. As the accumulated depreciation increases, the book value of the asset decreases.

6. Report the asset and accumulated depreciation on the balance sheet: The asset account and the accumulated depreciation account should be reported separately on the balance sheet. The asset account should show the cost of the asset, while the accumulated depreciation account should show the total amount of depreciation recognized on the asset.

Overall, accounting for accumulated depreciation is important as it ensures that the value of assets on the balance sheet reflects their true economic value, and it also helps to accurately calculate the net income of a business.