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What is Accrued Depreciation?

Accrued depreciation is the total value that an asset has lost over time due to wear, tear, and obsolescence. It reflects how much of an asset's useful life has been consumed. Understanding this concept is crucial for both asset valuation and financial reporting. Curious about how this impacts your investments or business assets? Let's delve deeper into the implications of accrued depreciation.
Jim B.
Jim B.

Accrued depreciation is the amount of total value that an asset has lost since it was newly purchased. Also known as accumulated depreciation, it is included on the balance sheet of a company or business as a liability to reflect the lesser value of the asset in question. There are many different ways that an asset's depreciation may be calculated, with the most common examples being straight-line depreciation and declining balance depreciation. No matter the method of depreciation, the accrued depreciation represents the amount of value that has been lost over the life span of the asset.

When a business purchases an asset, whether it's a business vehicle or a computer or something else that can lose value with the passage of time, it is allowed to write off the amount of value the asset loses each year. This process, known as depreciation, allows the business to pay taxes based on what the asset is worth as time passes rather than always paying off on it as if it was new. After the amount of value lost begins to build up over a period of several years, the total amount of depreciation is known as accrued depreciation.

Woman holding a book
Woman holding a book

On a balance sheet, accrued depreciation is normally included as a liability right underneath the asset it represents. This type of account on a balance sheet is known as a contra account, because it works against the asset. For example, an asset might have been worth $5,000 US Dollars (USD) at the time of its purchase, but has depreciated in value $2,000 USD after a period of time. The $2,000 USD would be on the balance sheet as a contra account to the $5,000 USD.

There is a difference between accrued depreciation and appreciation expense that must be noted when a business comprises its balance sheet. The depreciation expense represents the amount of value an asset has lost in one year. If a computer purchased by a business is depreciating $1,000 USD each year, at the end of the second year the accumulated depreciation would be $2,000 USD. By contrast, the depreciation expense on the balance sheet would still be $1,000 USD in the second year.

Many different ways are used to calculate the depreciation of an asset. The straight-line method is the simplest, simply taking the worth of the asset at purchase and dividing it by the years the asset is expected to be in use. For example, a car worth $5,000 USD that is expected to last five years would depreciate $1,000 USD, or $5,000 USD divided by five, every year. In the declining balance depreciation method, a percentage rate of deterioration is attached to the asset that reduces the worth of the asset by that rate each year, thus resulting in a declining depreciation expense each year. Accrued depreciation is the sum total of the depreciation that has occurred by whatever method is chosen.

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