Accumulated Depreciation: Definition and Examples

What is Accumulated Depreciation?

Accumulated depreciation is the sum of all depreciation on a fixed asset. It is a running total that increases each period until the fixed asset reaches the end of its useful life. It represents the loss of the asset’s value over time. 

Accumulated depreciation is a contra-asset account that appears on the asset section of the balance sheet. Rather than being explicitly listed on the balance sheet, it may be included in the net property, plant, and equipment (PP&E)-- or net fixed asset– total in the asset section on the balance sheet. 

Accumulated Depreciation vs. Depreciation Expense

A journal entry to record depreciation in a company’s general ledger has two parts. It is a debit to depreciation expense– which appears on the income statement– and a credit to accumulated depreciation– which appears on the balance sheet. Accumulated depreciation keeps a running total of all the depreciation expense recorded to date for that asset, while depreciation expense is an annual amount that only appears on the current year’s income statement. 

How Do I Calculate Accumulated Depreciation?

Accumulated depreciation is the sum of all depreciation expenses taken on an asset since the beginning of time. There are several methods for calculating depreciation expense. Once you calculate the depreciation expense for each year, add the years’ depreciation expense together until you get to the point at which you want to calculate accumulated depreciation. 

Straight-Line Depreciation Method

Straight-line depreciation is the simplest method where the same amount of depreciation expense is taken every year for the useful life of the asset. If you are using straight-line depreciation, the annual depreciation expense can be calculated as:

Straight Line Annual Depreciation Expense = (Acquisition Value - Salvage Value) / Useful Life

Double Declining Balance Depreciation Method

Double declining balance is another common method of depreciation. Under double declining balance, you take double the straight-line percentage rate each year by the book value until you reach the salvage value. Unlike straight-line depreciation, you do not have to subtract salvage value from the acquisition value prior to calculating depreciation. The book value starts at the acquisition value and then is recalculated every year after the depreciation expense is taken. The ending book value of one year becomes the beginning book value of the next year.

If the straight-line depreciation was taken over a useful life of 5 years, the percentage per year would be ⅕. Under double declining balance, you’d take ⅖ of the acquisition value each year. In the final year of depreciation, the amount may need to be limited in order to stop at the salvage value. 

Double Declining Balance Annual Depreciation Expense = 2 x Straight Line Depreciation Percentage x Beginning Book Value

Sum-of-the-Years’-Digits Depreciation Method

The sum-of-the-years’ digit depreciation method uses a fraction based on the sum of the years’ digits in the useful life. This fraction is multiplied by the depreciable base– the acquisition value minus the salvage value. The denominator in the fraction is the sum of all years’ digits from the useful life, while the numerator starts at the highest year and counts in descending order to 1. For example, an asset with a five year useful life will have the depreciable base multiplied by the following fractions: 

• 5/15 in year 1
• 5/15 in year 2
• 3/15 in year 3
• 2/15 in year 4
• 1/15 in year 5

Accumulated Depreciation Example

Straight-Line Depreciation

ABC Company has a $20,000 piece of equipment with a $5,000 salvage value. It uses the straight-line depreciation method. The useful life for the asset is 5 years, and the asset has been in service for 3 years so far. The accumulated depreciation can be calculated as follows:

($20,000 - $5,000) / 5 years = $3,000 annual depreciation expense

Where:

• $20,000 = acquisition value
• $5,000 = salvage value
• 5 years = useful life

The accumulated depreciation by year 3 is, therefore:

$3,000 x 3 years = $9,000 accumulated depreciation

Where:

• $3,000 = annual depreciation expense
• 3 years = years in service so far

Double Declining Balance Depreciation

XYZ Company has a $20,000 piece of equipment with a $5,000 salvage value. It uses the double declining balance method. The useful life for the asset is 5 years, and the asset has been in service for 3 years so far. The accumulated depreciation can be calculated as follows:

$20,000 x ⅖ = $8,000 depreciation expense year 1

Where:

• $20,000 = acquisition value = beginning book value year 1
• ⅖ = 2 times the straight-line percentage of ⅕

($20,000 - $8,000) x ⅖ = $4,800 depreciation expense year 2

Where:

• $20,000 - $8,000 = $12,000 = beginning book value year 2
• ⅖ = 2 times the straight-line percentage of ⅕

($12,000 - $4,800) x ⅖ = $2,880 depreciation expense year 3

Where:

• $12,000 - $4,800 = $7,200 = beginning book value year 3
• ⅖ = 2 times the straight-line percentage of ⅕

However, $7,200 minus $2,880 equals $4,320. That is less than the $5,000 salvage value. For that reason, the annual depreciation expense in year 3 must be limited to only $2,200. 

$7,200 - $5,000 = $2,200 depreciation expense year 3

Where:

• $7,200 = beginning book value year 3
• $5,000 = salvage value
• $2,200 = actual annual depreciation expense year 3

The accumulated depreciation by year 3 is, therefore:

$8,000 + $4,800 + $2,200 = $15,000

Where:

• $8,000 = depreciation expense year 1
• $4,800 = depreciation expense year 2
• $2,200 = depreciation expense year 3

Sum-of-the-Years’-Digits Depreciation

LMN Corp. has a $20,000 piece of equipment with a $5,000 salvage value. It uses the sum-of-the-years’-digits method. The useful life for the asset is 5 years, and the asset has been in service for 3 years so far. The accumulated depreciation can be calculated as follows:

($20,000 - $5,000) x 5/15 = $5,000 depreciation expense year 1

Where:

• $20,000 = acquisition value
• $5,000 = salvage value
• 5 years = largest year in useful life
• 15 years = 5+4+3+2+1 = sum of years’ digits 

($20,000 - $5,000) x 4/15 = $4,000 depreciation expense year 2

Where:

• $20,000 = acquisition value
• $5,000 = salvage value
• 4 years = second largest year in useful life
• 15 years = 5+4+3+2+1 = sum of years’ digits 

($20,000 - $5,000) x 3/15 = $3,000 depreciation expense year 3

Where:

• $20,000 = acquisition value
• $5,000 = salvage value
• 3 years = third largest year in useful life
• 15 years = 5+4+3+2+1 = sum of years’ digits
  

The accumulated depreciation by year 3 is, therefore:

$5,000 + $4,000 + $3,000 = $12,000

Where:

• $5,000 = depreciation expense year 1
• $4,000 = depreciation expense year 2
• $3,000 = depreciation expense year 3

What Type of Account is Accumulated Depreciation?

Accumulated Depreciation is a contra-asset account. That means it has a negative balance compared to its corresponding fixed asset account. Asset accounts have a natural debit balance, so accumulated depreciation has a natural credit balance. It works to offset and lower the net value of the related fixed asset account.

Is Accumulated Depreciation an Asset?

Accumulated depreciation is not an asset. Assets have economic value that benefit the company over multiple accounting periods. It is also not a liability because it does not represent an obligation to pay a third party. It is a contra-asset account however, so it appears on the balance sheet in the asset section. 

Where Does Accumulated Depreciation Appear on the Financial Statements?

Accumulated depreciation appears in the company’s balance sheet under the asset section. Some balance sheets may report the net of all property, plant, and equipment (PP&E) – another term for fixed assets. If a net total is given, the accumulated depreciation is already subtracted and accounted for in the resulting figure. Other balance sheets may have more detail to include the subtotals of various asset types. Examples of asset types that may appear net of accumulated depreciation on the balance sheet include:

• Land
• Buildings
• Vehicles
• Fixtures and Equipment

Real World Example: Target’s 2023 Accumulated Depreciation

In its 10-K Report, Target Corporation lists its major PP&E asset types and the accumulated depreciation in its Consolidated Statement of Financial Position– another term for a balance sheet– before it gives the net PP&E. The accumulated depreciation is listed at $22,631 million in 2023 and $21,137 million in 2022. These figures have a negative balance and reduce the total PP&E to arrive at the net PP&E figure.

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