Hi there,
I feel confused about the definition of accumulated depreciation. So depreciation is like allocating the cost of tangible goods over its life and should be counted as part of Expenses. Then what is accumulated depreciation…? The sum of depreciation values? Would that just become the historical cost?
Why should accumulated depreciation be counted as part of Assets?
depreciation is an expense, a flow that arises in every period. The sum of all past depreciation expenses on a given tangible asset constitute accumulated depreciation. It is needed to compute the carrying value of the asset that is reported on the balance sheet, which is given by historical cost minus accumulated depreciation. In that sense, accumulated depreciation is a contra-asset account, i.e the asset values reported are net of accumulated depreciation. It is also helpful if you want to know the age of the asset.
Yes: accumulated depreciation is the sum of all of the depreciation values. It’s not an asset, it’s a contra-asset; i.e., it reduces the value of the asset with which it is associated. When that asset reaches its useful life, the net value (historical cost, which hasn’t changed, less accumulated depreciation) will be the (estimated) salvage value of the asset.
Thanks!! It makes more sense to me now.
Is it correct if I think about it this way: when the next period comes, expense increases because of depreciation. Net income decreases and total equity decreases. Meanwhile, the accumulated depreciation (sum of depreciation) increases as a contra-asset, hence total assets decrease. Then the balance sheet remains balanced.
You got it!