Understanding Accumulated Depreciation
Accumulated depreciation is the total depreciation expense recognised on a fixed asset from its acquisition date to the current reporting period. It appears on the balance sheet as a contra-asset, reducing the asset's gross carrying value to its net book value.
Under US GAAP (ASC 360) and IFRS (IAS 16), companies must consistently apply a depreciation method and disclose accumulated depreciation in financial statements. The choice of method significantly affects reported earnings and tax liability.
Depreciation Method Comparison
| Method | Annual Expense | Complexity | Best For | Tax Impact |
|---|---|---|---|---|
| Straight-Line (SL) | Equal each year | Simple | Buildings, furniture | Conservative |
| Double-Declining (DDB) | Higher early, lower late | Moderate | Vehicles, tech assets | Accelerated (front-loads deductions) |
| Sum-of-Years Digits | Decreasing | Moderate | General equipment | Accelerated |
| Units of Production | Varies with output | Data-intensive | Machinery, mines | Production-linked |
Straight-Line Formula
Double-Declining Balance Formula
Note: depreciation stops when book value reaches salvage value.
Book Value vs. Market Value
Book value (cost minus accumulated depreciation) rarely equals market value. A 5-year-old vehicle fully depreciated on the books may still sell for $8,000. Conversely, a commercial building appreciating in the market may show near-zero book value. Accumulated depreciation is an accounting construct, not a measure of economic value.