What is Accumulated Depreciation? Calculations and Examples

Definition of Accumulated Depreciation
Depreciable Assets
How to Calculate Accumulated Depreciation?
Features and Causes of Depreciation
Methods of Depreciation
Objectives for Providing Depreciation or Accumulated depreciation

Definition of Accumulated Depreciation

Accumulated depreciation is the total amount a company depreciates its assets, while depreciation expense is the amount a company’s assets are depreciated for a single period. Essentially, accumulated depreciation is the total amount of a company’s cost that has been allocated to depreciation expense since the asset was put into use. What is Accumulated Depreciation? Calculations and Examples

Depreciable Assets

Depreciable assets are those assets which fulfil the following conditions:

It is expected to be used for more than one accounting period
Have a limited useful life
These are held for the purpose of production of goods and services and not for sale in the ordinary course of business

Depreciation Accounting covers all the assets, except for the following: –

Forests, plantation and other similar regenerative natural resources
Wasting assets
Expenditure on research and development
Goodwill
Livestock
Land

How to Calculate Accumulated Depreciation?

To calculate accumulated depreciation, there are 3 important factors you need to consider. What is Accumulated Depreciation? Calculations and Examples

accumulated depreciation factors

Now that you the 3 factors to consider the accumulated depreciation, you can calculate using the below formal. What is Accumulated Depreciation? Calculations and Examples

calculation of accumulated depreciation

Here, the cost of assets is reduced with the estimated residual value of an asset at the end of its useful life to arrive the accumulated depreciation. What is Accumulated Depreciation? Calculations and Examples

calculation of accumulated depreciation

Accumulated Depreciation Examples

Machinery is purchased for Rs. 1,70,000 /- and at the end of the useful life of the machinery, the residual value is estimated at Rs. 70,000 /-. As per the estimation made by the company, the machinery will work for 5 years.

Considering the above example, the sum of expense to be allocated as depreciation in the accounting periods will be calculated as below: What is Accumulated Depreciation? Calculations and Examples

Acquisition Cost = Rs. 1,70,000.

Less – Residual Value = Rs. 70,000.

Depreciable Amount = Rs. 1,00,000.

Estimated life of the asset = 5 Years.

Depreciaton= Depreciable amount / Useful life of an asset

= Rs. 1,00,000 / 5

= Rs. 20,000 Per year

The Accumulated Depreciation of the machinery at the end of 5 years, assuming straight-line method of deprecation is Rs. 1,00,000 /- (Rs. 20,000 * 5)

Features and Causes of Depreciation

Features of Depreciation

Depreciation is a part of operating cost.
It is a reduction in the value of an asset.
The decrease in the value of an asset is gradual and continuous.

Causes of Depreciation

Physical wear and tear
Physical deterioration
Expiry of legal rights
Obsolescence

Methods of Depreciation

Basically, methods for providing depreciation are based on the formula, developed on a study of the behaviour of the assets over a period of years. This is done for readily computing the amount of depreciation suffered by different forms of assets. However, these methods should be applied only after carefully considering the nature of the asset and the conditions under which it is being used. What is Accumulated Depreciation? Calculations and Examples

Methods

Explanation

Straight-line method of Depreciation

According to this method, an equal amount is written off every year during the working life of an asset so as to reduce the cost of the asset to its residual or nil value at the end of its useful life.

SLM method results in a constant charge over the useful life if the residual value of the asset does not change

Written down value or diminishing balance method

Under this system, a fixed percentage of the diminishing value of the asset is written off each year so as to reduce the asset to its residual value at the end of its life.

Written down value method results in a decreasing charge over the useful life.

Following are other methods of depreciation:

Sinking fund method
Sums of the digit method
Revaluation method
Depletion method
Machine hour rate method
Replacement method

Objectives for Providing Depreciation or Accumulated depreciation

Measurement of Correct Income

Depreciation should be charged for the proper estimation of periodic profit or loss. In case an enterprise does not account for depreciation on assets, it will not be considered a loss on the value of these assets due to their use in production and will not result in true profit or loss for a given period.

True Position in Statements

The assets should be adjusted for depreciation charged in order to depict the actual financial position. If depreciation is not accounted, the assets would be disclosed in financial statements at a value higher than their true value. What is Accumulated Depreciation? Calculations and Examples

Funds to be Made Available for Replacement

Generation of adequate funds in the hands of the business for assets replacement at the end of its useful life. Depreciation is a good indication of the amount an enterprise should set aside to replace a fixed asset after its economic useful life is over. However, the replacement cost of a fixed asset may be impacted by inflation or other technological changes. What is Accumulated Depreciation? Calculations and Examples

Deriving of True Cost of Production

For ascertaining the cost of the production, it is necessary to include depreciation as an item of cost of production. What is Accumulated Depreciation? Calculations and Examples

CALL US FOR ANY QUERY WE ARE GLAD TO HELP YOU OUT @9811782542 & 9911721597

Are You Looking For how to calculate accumulated depreciation on balance sheet
Are You Looking For how to calculate accumulated depreciation in excel
Are You Looking For accumulated depreciation example
Are You Looking For accumulated depreciation journal entry
Are You Looking For accumulated depreciation entry
Are You Looking For accumulated depreciation in balance sheet
Are You Looking For accumulated depreciation balance sheet example
Are You Looking For how to calculate accumulated depreciation on buildings