What is Accumulated Depreciation?
Accumulated Depreciation is simply the total of all the depreciation charges for an asset since it was purchased or first brought into use. The accumulated depreciation account is a balance sheet account and has a credit balance.
For example, if an asset has a cost 10,000 and is depreciated over 5 years, then the annual depreciation charge is 10,000 / 5 = 2,000 per year. This amount is charged to the profit and loss account each year.
After 3 years the total depreciation charge = accumulated depreciation = 3 x 2,000 = 6,000. This link between depreciation and accumulated depreciation is represented in the diagram below.
|Depreciation Year 1||Depreciation Year 2||Depreciation Year 3||Net Book Value|
|Accumulated Depreciation||Net Book Value|
The cumulative depreciation can also used to determine the net book value of the asset.
Using the example above, the net book value is given by the cost less the cumulative depreciation = 10,000 – 6,000 = 4,000.
For further information on Accumulated Depreciation see the Wikipedia definition.
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