Accumulated Depreciation Formula

Accumulated Depreciation Formula (Table of Contents)

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What is the Accumulated Depreciation Formula?

It is the aggregate of the wear and tear of the fixed asset, considered from the time since the purchase and set up of a fixed asset till the time period into consideration. It is subtracted from the asset’s historical cost value to arrive at the net book value.

Accumulated depreciation account is a contra account, which means it is shown as the deduction to the asset value and, therefore, offsets the balance in the asset account it is associated with.

Accounting Treatment

Whenever depreciation is recorded as an expense for the organization, the accumulated depreciation account is credited with the same amount – which will be shown against the cost of the asset and total cumulative depreciation of the asset.

The annual entry of the accumulated depreciation would like below, in the journal books:

After the useful life of the machine is over:

Formula for accumulate depreciation is –

Examples of Accumulated Depreciation Formula (With Excel Template)

Let’s take an example to understand the calculation of the Accumulated Depreciation Formula in a better manner.

Accumulated Depreciation Formula – Example #1

Company ABC bought machinery worth $10,00,000, which is a fixed asset for the business. It has a useful life of 10 years and a salvage value of $1,00,000 at the end of its useful life. Depreciation for the company is calculated using the straight-line method, which is $90,000 per year for the next 10 years until the value of the machinery becomes $1,00,000. Each year the accumulated depreciation account will increase by $90,000 per year. Therefore, for example, at the end of 5 years, annual depreciation is $90,000 but the cumulative depreciation is 4,50,0000. This cumulative figure is the accumulated depreciation. It remains in the company’s accounts until the asset is sold.

Solution:

Accumulated Depreciation is calculated using the formula given below

Accumulated Depreciation = ((Cost of Asset – Salvage Value)/ Life of the Asset) * No.of years 

For 2nd Year 

• Accumulated Depreciation = (($1,000,000 – $1,00,000) / 10 ) * 2
• Accumulated Depreciation = $1,80,000

For 5th Year

• Accumulated Depreciation = (($1,000,000 – $1,00,000) / 10 ) * 5
• Accumulated Depreciation = $450,000

For 9th Year

• Accumulated Depreciation = (($1,000,000 – $1,00,000) / 10 ) * 9
• Accumulated Depreciation = $810,000

Note:

Note here, that we are considering only 1 machinery for the given company. In reality, there are additions to this value in terms of any improvements, upgradations, or just buying a new piece. Each would have a different useful life and therefore the depreciation for each need to be calculated separately with the method followed since its setup. Below is an extract for a real company:

Accumulated Depreciation Formula – Example #2

Minda Corporation. 

Below is an Extract of the Effect of Depreciation, detailed Calculation is in the Excel Sheet.

• The highlighted box in red is the Net Block value you will see in the company’s balance sheet for 2017.
• This is the net of the accumulated depreciation, which is available over the cost and additions and reduced by the disposals

Below is the complete extract of the calculation of the Net Block, as of 2017.

• Notice, that the Tangible assets are all those assets that the company owns and can be seen as a part of the balance sheet.

For example, we have “Plant and Equipment” as a Tangible Asset. As on the date of 31^st March, 17, Plant and Equipment have a total value of Rs 620 mn, to which the company added further Rs 255 mn worth of equipment which are classified under “ Additions during the year”. Also, they sold or wrote off equipment worth Rs 18 mn. This added up to the total value of Plant and Equipment to Rs 857 mn. To arrive at the Net Block, it becomes important to calculate the depreciation and reduce it from the Gross Block, which is a total of Rs 126 mn as highlighted above.

Explanation

Step 1: Identify the Cost of the Fixed Asset on which Depreciation Needs to be Calculated

Identifying the fixed asset (s) of the business and those that are subject to a reduction in their values over the years due to usage, wear and tear or any other reason. This reduction in value can be termed as depreciation.

Step 2: Calculate the Depreciation Amount to be Considered

Estimate the useful life of the fixed assets and calculate the depreciation amount to be reduced from the asset value each year. The method of calculating the depreciation is mostly the straight-line method, which would mean the same amount of depreciation for one asset over the years of the useful life of the asset.

Step 3: Identifying the Year of the Balance Sheet is Prepared – to Arrive at the Accumulated Depreciation of the year

After calculating the depreciation amount for each year, the accumulated depreciation can be arrived at for a given year by adding up the annual depreciation amount for the previous years.

Relevance and Uses of Accumulated Depreciation Formula

Generally Accepted Accounting Policies (GAAP) require that depreciation expenses be charged to all fixed assets based on the estimated economic life of each.

The total amount of accumulated depreciation for a fixed asset will increase over time as depreciation continues to be charged for an asset over the life of it. The original cost of the asset is called the gross cost. When the original cost or the gross cost is reduced of any amount of accumulated depreciation and any impairment is called the net cost or carrying the cost. Accumulated depreciation helps to understand the total depreciation in running the fixed asset from its acquisition asset to its disposition asset. When this asset is to be sold or is obsolete, the total amount lying in the books of Accumulated depreciation is reversed along with the original cost of the asset, thereby eliminating all record of the asset from the balance sheet of the company.

Accumulated Depreciation Formula Calculator

You can use the following Accumulated Depreciation Formula Calculator

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