Accumulated Depreciation: Meaning, Formula, and Practical Example
Every fixed asset a business owns—like machines, vehicles, or furniture—loses value over time. This drop in value is called depreciation. But how do we track the total depreciation of an asset over the years? That’s where accumulated depreciation comes in.
In this blog, we’ll define accumulated depreciation, explain the accumulated depreciation formula, discuss its account type, and show you a practical example to make it all clear.
Define Accumulated Depreciation
Accumulated depreciation is the total amount of depreciation recorded against an asset since it was purchased. It is not a one-time entry but rather a running total of all depreciation expenses recorded over the asset’s life.
If a business has been depreciating a machine for 3 years at ₹10,000 per year, the accumulated depreciation at the end of year 3 would be ₹30,000.
This amount is subtracted from the asset’s original cost to calculate its book value or what it’s currently worth on paper.
Accumulated Depreciation Account Type
Now, you may wonder—what type of account is accumulated depreciation?
It is a contra-asset account. That means it appears on the asset side of the balance sheet but carries a credit balance. It reduces the total value of fixed assets, helping businesses reflect the actual value of assets after depreciation.
| Item | Value (₹) |
|---|---|
| Original Cost of Machinery | 1,00,000 |
| Accumulated Depreciation | 40,000 |
| Net Book Value | 60,000 |
Although it appears with assets, the accumulated depreciation account works like a liability because it holds a credit balance.
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Accumulated Depreciation Formula
The formula to calculate accumulated depreciation is straightforward. It depends on the depreciation method you choose. The most common one is the straight-line method .
Accumulated Depreciation = (Cost of Asset – Salvage Value) × Number of Years Used / Useful Life
Where:
- Cost of Asset is the original purchase price
- Salvage Value is the estimated value at the end of its useful life
- Useful Life is the expected life span of the asset
Practical Example
Let’s say a company purchases a delivery van for ₹5,00,000. The van is expected to have a useful life of 5 years and a salvage value of ₹50,000.
Step 1: Calculate annual depreciation
₹(5,00,000 – 50,000) / 5 = ₹90,000
Step 2: After 3 years, accumulated depreciation = ₹90,000 × 3 = ₹2,70,000
Net book value after 3 years = ₹5,00,000 – ₹2,70,000 = ₹2,30,000
This amount will be shown under accumulated depreciation in the books, reducing the value of the asset.
Importance of Accumulated Depreciation
Understanding and tracking accumulated depreciation is essential for:
- Accurate asset valuation – Shows true book value
- Better decision-making – Know when to replace or upgrade assets
- Tax compliance – Required for claiming depreciation benefits
- Audit readiness – Clear financial reporting supports audits
Read More: Audit Trail Applicability and Best Practices
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Conclusion
Accumulated depreciation helps businesses reflect the true value of their fixed assets over time. Managing your books becomes much easier once you define accumulated depreciation, understand the formula, and know the account type it falls under.
It ensures better asset tracking, supports financial transparency, and helps meet tax obligations efficiently.
I am a chartered accountant with over 14 years of experience. I understand income tax, GST, and balancing financial records. I analyze financial statements and tax codes effectively. However, I also have a passion for writing, which is different from working with numbers. Recently, I started writing articles and blog posts. My goal is to make finance easier for everyday people to understand.
Frequently Asked Questions
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Why is accumulated depreciation considered a contra-asset account?Accumulated depreciation reduces the book value of fixed assets over time. It's recorded as a contra-asset because it offsets asset value. In BUSY, both asset and depreciation values are tracked, showing the net book value automatically on reports.
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How do you calculate accumulated depreciation using the straight-line method?Divide the asset's depreciable cost by its useful life. For example, an asset worth ₹1,00,000 with a 5-year life has ₹20,000 depreciation per year. BUSY allows auto-calculation of depreciation using straight-line or WDV methods for easy tracking.
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Where does accumulated depreciation appear on the balance sheet?It appears below the related fixed asset as a deduction. The result is shown as “Net Book Value” of the asset. BUSY's balance sheet format clearly reflects gross asset value, accumulated depreciation, and net value.
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What is the difference between depreciation and accumulated depreciation?Depreciation is the yearly expense recorded for asset wear and tear. Accumulated depreciation is the total of all such expenses to date. BUSY tracks both and reflects them in financial statements with complete accuracy.
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How does accumulated depreciation affect the net book value of an asset?As depreciation accumulates, the net book value (Asset Value - Accumulated Depreciation) decreases. BUSY calculates this automatically, ensuring your asset reports show the accurate current value for accounting and compliance purposes.
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Can accumulated depreciation exceed the asset's original cost?No, accumulated depreciation cannot exceed the asset's historical cost. Once the asset is fully depreciated, no further depreciation is recorded. BUSY restricts depreciation entries beyond the asset's useful life or cost to maintain accuracy.