What is accumulated depreciation?

In plain English

It is a contra asset account: it carries a credit balance that reduces the cost of fixed assets on the balance sheet. The asset's cost minus accumulated depreciation is its book value.

It keeps growing each period until the asset is fully depreciated or disposed of.

Why it matters

Accumulated depreciation shows how much of your equipment's cost has already been used up. Without it, a five year old truck sits on the balance sheet at its full purchase price, which overstates the business's assets and can make your net worth look better to a lender than it really is.

It also matters when you sell or scrap an asset. The gain or loss on a sale is based on the book value, which depends on accumulated depreciation. If this account is wrong or missing, the gain or loss you report will be wrong too.

Worked example

Equipment cost $6,000, depreciated $1,200 a year. After 18 months, accumulated depreciation is $1,800 and the book value is $4,200.

How to handle it

1. Set up a separate accumulated depreciation account for each major asset class, listed right under the related fixed asset account.
2. Each month or year, post depreciation with a debit to depreciation expense and a credit to accumulated depreciation.
3. Keep a fixed asset register showing cost, depreciation to date and book value for each item.
4. At year end, compare the register total to the accumulated depreciation balance on the balance sheet.
5. When an asset is sold or thrown out, remove both its cost and its accumulated depreciation from the books.

Common mistakes

• Crediting depreciation directly to the asset account, which loses the original cost and makes the register hard to tie out.
• Leaving accumulated depreciation in place after an asset is sold, so the balance sheet still carries part of something you no longer own.
• Letting accumulated depreciation exceed the asset's cost, which produces a negative book value that should not exist.
• Ignoring the depreciation figures your tax preparer sends, so the books and the return drift apart year after year.

Not the same as: Depreciation

Depreciation is the expense for one period. Accumulated depreciation is the running total of all depreciation recorded on an asset so far. See Depreciation.

Go deeper

• Depreciation Basics for Small Business Owners: What depreciation is, how straight-line works, the difference between book and tax depreciation, and how to record it without overcomplicating.
• Fixed Asset Register: How to Build and Maintain One: Create a simple register of equipment and property with costs, dates, locations and disposal records that stays useful for taxes and insurance.

Related terms

• Aging report: A report that lists unpaid invoices or bills grouped by how long they have been outstanding.
• Amortization: Spreading the cost of an intangible asset, or the repayment of a loan, over time.
• Accrued expense: A cost you have incurred but not yet paid or been billed for, recorded so the right period carries it.

Common questions

General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.