Is accumulated depreciation a current asset? Accumulated depreciation is a record of all the depreciation expense of an asset since its acquisition by a company. The depreciation expense is an account that shows the reduction in the value of an asset based on its use per the reporting period in view. It is considered a non-cash expense. When companies purchase assets such as buildings, vehicles, equipment, machinery, and all other items that are liable to wear and tear over time and use, their useful lifespan has to be determined.
Once the useful lifespan of an asset has been determined, the cost of purchasing the asset is gradually reduced over time as the asset gets used by the company. In this article, we shall discuss accumulated depreciation and current assets; this will aid us in determining if accumulated depreciation is a current asset or not.
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What is accumulated depreciation?
Accumulated depreciation is the cumulative depreciation recorded against an asset since its purchase. By being recorded against an asset, it reduces the gross amount of the asset thereby recording the extent to which an asset has been used by its owner from the time the asset was purchased to the accounting period in view.
Companies usually depend on various assets such as vehicles, computers, buildings, equipment, etc. to ease their daily business operations. As the assets get used over time, their value reduces due to the wear and tear that comes with constant use. The reduction in value means that when the company wants to sell such assets, it will have to sell them at a lower price than it originally purchased them. Hence, companies keep a record of the asset’s depreciation (depreciation expense) and its cumulative depreciation (accumulated depreciation) to account for the reduction in the asset’s value.
The accumulated depreciation account has a negative book balance which reduces the balance of the asset account with which it is associated. This means that while the asset account has a positive book balance or debit, accumulated depreciation has a negative book balance or credit. It appears on the balance sheet of a company as a reduction from the total amount of the company’s fixed assets.
Accumulated depreciation is calculated for capital assets that reduce in value with use and can be sold at their salvage when they are fully depreciated. An asset’s salvage value is its expected selling price upon the expiration of its useful lifespan. While the depreciation expense reports the asset’s depreciation for a single period, the accumulated depreciation reports the total amount of depreciation for an asset from the time it was purchased until the particular time under review. In other words, accumulated depreciation is the sum of all the depreciation expense and the beginning accumulated depreciation for the asset.
The accumulated depreciation of an asset increases over time as the asset’s value decreases. Hence the value of the assets as reported on the company’s balance sheet is their historical value minus their accumulated depreciation. This is so to ensure that the figures in the balance sheet are in tune with each other.
Accumulated depreciation as a contra-asset account
Accumulated depreciation is a contra-asset account because it has a natural credit balance while an assets account has a natural debit balance. This means that the accumulated depreciation account reduces the balance of the asset account that it is paired with. A credit to the accumulated depreciation account increases its balance while a debit decreases its balance.
When companies record depreciation expense for an asset, an equal but opposite entry is made to the accumulated depreciation account. This is done to ensure that both accounts are up-to-date and balanced. It further shows the current book value of the asset, its historical value, and real-time depreciation.
Accumulated depreciation is an asset account with a credit balance hence it is a long-term contra-asset account that records the amount of an asset that has been used up from the time of its purchase until the time under consideration. It is recorded on the balance sheet on the left column or assets side. The credit balance of the accumulated depreciation account offsets the balance of the account to which it is paired; this results in the net book value of the asset.
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Recording accumulated depreciation
Companies expense the value of an asset based on its useful lifespan yearly based on the matching principle of GAAP (Generally Accepted Accounting Principles). The matching principle requires that when revenue is generated by a company, the matching expenses must be recorded within the same accounting period. Hence when an asset generates revenue for a firm, the estimated wear, and tear (depreciation of the asset) is recorded as depreciation expense within the same accounting period as the generated revenue.
For every accounting period, the previous depreciation expense is added to the accumulated depreciation; this gives the accumulated depreciation of the asset. When reporting the depreciation of assets, the depreciation expense account is debited while the accumulated depreciation account is credited. The journal entry to record the depreciation of an asset will look similar to the one below:
On the balance sheet, accumulated depreciation is usually recorded along with the property, plant, and equipment (PP&E) of a company or reported immediately below it.
What is a current asset?
A current asset is any item owned by an individual or corporate entity which is easily convertible to cash. Generally, the time frame of conversion to cash for current assets is one year. Thus, they are said to be easily liquid.
Assets are resources that bring economic value to their owners immediately or in the future. The economic value of assets lies in their reducing cash outflow, increasing cash inflow, or easing daily business operations. Assets are divided into current and non-current assets.
Current assets bring value to their owners within a short period of time. Common examples of current assets include accounts receivable, short-term investments, prepaid liabilities, inventory, and cash.
Non-current assets are resources that aid daily business operations and are not meant to be sold until they are fully depreciated. If however, their owners wish to sell them off, they usually take more than one year to get liquidated. Hence they are not as easily liquid as current assets.
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Is accumulated depreciation a current asset?
Accumulated depreciation is an account that records the cumulative depreciation expense of the assets with which it is paired. It is therefore said to be a contra-asset account. Hence, accumulated depreciation is not a current asset.
From the above definition of current assets as resources that bring economic value to their owners within one year, we can see that accumulated depreciation is not a current asset. This is because accumulated depreciation does not bring economic value to the company that records it.
Additionally, accumulated depreciation is not a current asset because the balance in the accumulated depreciation account cannot be used to settle liabilities or acquire more assets. It is also not going to increase cash inflow, reduce cash outflow or ease the daily business operation. Instead, the accumulated depreciation account records the decline in value of fixed assets over time; usually their useful lifespan.
Accumulated depreciation is not recorded for current assets because these assets are frequently used and replaced, usually within one year. Hence due to the short life span of current assets, they are not depreciated. Recording depreciation for long-term assets aids companies in avoiding major losses in the year in which they purchase these assets by spreading the cost of the purchase over the asset’s useful lifespan.
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Is accumulated depreciation a current asset? Accumulated depreciation is not a current asset, it is a contra-asset account instead. The total decrease in the value of an asset over time is the asset’s accumulated depreciation. Generally, companies aggregate the accumulated depreciation of all the assets they own and report them as a single entity on their balance sheet. Accumulated depreciation is usually reported along with or below the property, plant, and equipment (PP&E) of the company.
When making journal entries to account for the reduction in the value of their assets, companies make two journal entries that are equal but opposite. The journal entry usually entails a debit to the depreciation expense account and a credit to the accumulated depreciation account. the sum of the accumulated depreciation of an asset and its depreciation expense will result in the historical cost of the asset. The difference between the historical cost of an asset and its accumulated depreciation will result in the net book value or carrying value of the asset.
Companies record accumulated depreciation for the fixed assets they own to avoid reporting major losses in the year in which they purchased the assets. Additionally, it serves as a means of accounting for the reduction in the value of the asset as it gets used from year to year by the company.