Accumulated Depreciation Example

Accumulated depreciation is the term which confuses many students of accountancy because accumulated depreciation differs from normal depreciation in the sense that while depreciation is done on yearly basis whereas accumulated depreciation is sum total of depreciation charged till date, it can be better understood with the help of an example –

Accumulated Depreciation Example

Suppose a company purchased machinery in the year 2011 worth $100000 and the depreciation rate on machinery is 10 percent and company uses straight line method then in the year 2011 deprecation amount will be $10000, in the year 2012 deprecation amount will be again $10000 and till the year 2015 the total depreciation will be $50000 for 5 years and this amount accumulated for 5 years is called accumulated depreciation.

Accounting treatment of accumulated depreciation is also tricky one, initially when company has the policy of considering depreciation as accumulated depreciation then following journal entry will be passed –

Depreciation account Dr

   To Accumulated depreciation account

As one can see from the above that depreciation account is debited as it is an expense while ideally asset account should have been credited but when company maintains accumulated depreciation account than it is credited and not the assets account. When company sells the asset after few years then following journal entry will be passed

Accumulated depreciation account Dr

   To Asset account

Conclusion

As one can see from the above that once the asset is sold its account is credited making it nil in the books of account and also accumulated depreciation account is debited so as to remove it completely from the books of account. One should keep in mind that accumulated depreciation can never be more than the book value of the asset because the book value of asset is calculated as original cost of machine – accumulated depreciation till date. In balance sheet accumulated depreciation is shown as a deduction from the value of asset as it is a contra asset account.

Above example was simple however in practical life there are many complications like if company uses written down vale method or accelerated method then in accumulated depreciation account depreciation will be accumulated at faster rate or if company sells asset at more than or less than book value then accounting treatment will have to be made accordingly or if company changes method of depreciation from straight line method to written down value method or vice versa then it will affect accumulated depreciation accordingly .

0 comments… add one

Leave a Comment


Related pages


what is consignor and consigneewhat is the difference between accounts payable and receivablewhat is the full form of cpifeatures of capitalismlimitations of zero based budgetingadvantages and disadvantages of pay back perioddisadvantages of stock dividendsmeaning of slr and crradvantages and disadvantages of couponsfactoring advantagesaccounting concept meaningimportance of mixed economyconglomerate diversification definitionbill discounting meaning with exampledirect quote fxdefine a mixed economywhat are derivative marketsshukria definitionadvantages of debenturedisadvantages of commodity moneyfifo methodsdisadvantages of a mixed economytypes of factoringsundry items examplesfreight outwardterm loan and overdraftsources of long term finance advantages and disadvantagesjit production advantages and disadvantagesfree market economy advantages and disadvantages pdffeatures of urbanisationdeclining balance method depreciationwhat is the meaning of current liabilitiesmarket skimming examplesexamples of monopolistic competition marketswhat are the disadvantages of socialismunearned fees journal entrybarter system economywhat is an autocratic leadership styleindirect quotation exchange ratemeaning of debentures in hindidu pont equationkinds of elasticity of demanddecentralisation advantagesrecording prepaid expensesdefine floating currencyadvantages and disadvantages of delegation in managementlaws of diminishing returnsdefine certificate of depositsasset revaluation journal entriesdisadvantages of monopolistic competitionrent received in advance journal entrynegative aspects of capitalismdupont system analysistrade discount accounting treatmentexample of debit noteslums-curse to urbanisationconglomerate mergerdividend wikiadvantages of industrial agricultureadvantages and disadvantages of inventoryautocratic leadership style pdffull form of gstadvantages of a debit cardfifo method inventorybad debts entrydepreciation declining balancedefine draweedifference between bearer cheque and order chequedefinition of drawee and drawerdisadvantage of international tradeadvantages and disadvantages of rural and urban lifeexample of complements in economicsjunk bonds meaningjournal entry for prepaid rentwhat is a debenture loanadvantages and disadvantages of perfect competitiondifferentiate between socialism and capitalism