Question

What is accumulated depreciation? Can someone explain this concept with EASY English?

Answer 1

Answer.

Accumulated Depreciation is the total sum of fixed assets' (plant, machinery, equipment, vehicle and furniture) cost that is allocated as depreciation expenses for their use in the business. When fixed assets is used in the business, the cost of assets used is known as depreciation expense and Depreciation expense is debited whenever it is charged on fixed assets. But at the same time, Accumulated Depreciation is also recorded as Contra entry to concerned fixed assets. So, Accumulated Depreciation is credited in the books of account.Thus, accumulated depreciation is just like a provision for Depreciation.

When Depreciation Expense is recorded in the journal, the following journal entry is passed.

Depreciation Expense ..... Dr.

Accumulated Depreciation...... Cr.

The Accumulated Depreciation account is maintained until the the concerned assets is dispossessed of (sold or removed on account of being useless).

At the time of disposal of assets, Accumulated Depreciation is debited with the total amount of Depreciation expenses charged on the said assets. Let us understand with simple example.

On 1 January 2019, a corporation purchased a plant equipment for $ 90,000 and paid $10,000 for transportation and installation charges. The life of equipment is 5 year and the corporation uses straight line method for charging depreciation expense. The accounting year ends on Dec. 31, each year.

From the above question we will learn, how the corporation will record Accumulated depreciation as well as depreciation expense.

First of all, we will calculate the amount of Depreciation Expense assuming that the Depreciation is charged annually.

Straight line Method:

Deprecition Rate = 1÷ useful life ×100

=1÷5 × 100 = 20%

Annual Depreciation Expense = $100,000 × 20% =$20,000

If Depreciation Expense is charged monthly, then $20,000 will be divided by 12 to calculate monthly Depreciation Expense.

The annual Depreciation Expense is $20,000. Thus, the Accumulated Depreciation (Contra Entry to Equipment) for 1 year will be same $20,000.

Now, the journal entry to record Depreciation Expense and Accumulated Depreciation at the end of 1 year as on Dec. 31, will be as follows.

2019

Dec.31. Depreciation Expense..... Dr. $20,000

Accumulated Depreciation. $20,000

The depreciation expense is debited on account of increase and the Accumulated Depreciation is credited on account of increase in it too.

Each time Depreciation Expense is charged or allocated on equipment, Accumulated Depreciation is also increased by the same amount.

So, if the corporation charges Depreciation for 2nd year ended on Dec. 31, 2020, the Accumulated depreciation now will be $40,000. This is $20,000 for year 1 plus $20,000 for year 2 totalling $40,000.

The Accumulated depreciation will be presented in the balance sheet immediately below the Plant equipment and it is deducted from it and the net balance is shown as net Plant equipment. In trial balance, Accumulated Depreciation is presented on the credit side immediately after the presenting the plant equipment amount on the debit side.