Question

When learning about depreciation and how to record it into the journal, we hear about an account called accumulated depreciation and that it is a contra asset account. Please explain what this account is and what it means to be a contra asset account.

Answer 1

Accumulated depreciation is a contra asset account that used to determine the book value of an asset.
In this account we can see the total amount of depreciation charged as expenses staring from the acquisition of the asset made with a credit balance.
The basic journal entry for depreciation is debit for depreciation expenses and credit goes to the related asset account, this implies that the value of the fixed asset reduces for every single accounting period and company records the expenses and generates the revenue. Thus, this would be an improper accounting process done under matching principle.
Under matching principle, revenues need to be matched with related expenses. But, In reality, revenues cannot always be directly associated with a specific fixed asset.
Thus, to simplify it, a simple entry designed to accommodate all types of fixed assets, or it may be subdivided into separate entries for each type of fixed asset.
Therefore, the basic entry for depreciation is: Debit depreciation expenses and credit the accumulated depreciation account. Over time, the accumulated depreciation balance will continue to increase because of every year depreciation expenses is added to it, until it equals the original cost of the asset. At that time, we stop recording any depreciation expense, since the cost of the asset has now been reduced to zero.