What is Accumulated Depreciation
Depreciation is a concept where the value of the assets decreases in the course of time. Accumulated depreciation is a separate account maintain in the balance sheet is known as accumulated depreciation. Normally, the expenses to the firm due to depreciation are calculated under the income statement in the balance sheet. The accumulated depreciation itself is a separate account that always has a negative amount. This account is directly related to other another fixed assets accounts in the balance sheet.
Reasons to maintain the accumulated depreciation are because to indicate the historical cost of the fixed assets on the balance sheet. It is a known fact that the value of the fixed assets reduces in the course of time. A fair value of depreciation is accumulated in the course of time. In case it is less than the fair value price of the fixed asset, then the depreciation is added to the accumulated depreciation account.
There are 2 types of assets under the concept of accumulated depreciation: –
- Current assets – Current assets are those assets which are purchased by the company for its operations. These assets are used by the company for a shorter period of time. The time span of the current assets is less than 2 years after purchase. These assets do not undergo depreciation.
- Long term assets – Long term assets can also be called as fixed assets. These are the assets which are purchased by the company for its operations. The fixed assets are used by the company for a long period of time which is more than 2 years. When the long term asset is purchased by the company, the asset is not considered as an expense. Rather, it is gradually accounted under the expenses account in the form of depreciation. This is because the value of the asset reduces due to use.
These are the different types of assets, and accumulated depreciation is only based on long term assets. There are various methods that are formulated to calculate the depreciation of a particular fixed asset:-
Straight line method of depreciation is the often used technique for calculating depreciation. In this method, the salvage value of the asset is estimated by the company at the end of the financial year. Another method used lately by many firms is the declining balance method. This method the depreciation of the asset in the first year is high and gradually the depreciation reduces. These are the most popular methods used to calculate depreciation. There are other depreciation methods available which have different ways to rightly calculate the depreciation. The depreciation method can be selected according to the asset that needs to be depreciated.