Accumulated depreciation is the total depreciation that has been charged on an asset since the date of its purchase. Assets have a debit balance and are recorded on cost less accumulated depreciation that has a credit balance. When depreciation is charged for a period the depreciation expense is debited and accumulated depreciation expense is credited.
The reason to build an accumulated depreciation account is to keep track of the amount already expensed and at the time of disposal, it is easy to calculate the net book value of the asset.
Assume that a car was purchased for $80,000 that has a useful life of 10 years. Assuming $8000 is annual depreciation that is charged on a straight-line basis. After 5 years the accumulated depreciation will be $40,000($8000 x 5 years). The car will be shown on the balance sheet as follows:
Car at cost $80,000
Less: Accumulated Depreciation Expense (40,000)
Net book value $40,000
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