Is accumulated depreciation an asset? Accumulated depreciation is the total depreciation that is reduced from the value of an asset, and recorded on the credit side to offset the balance of the asset. In the balance sheet, accumulated depreciation is treated as a long-term contra asset that is categorized under the heading property, plant, and equipment.
The majority of companies depend on capital assets like equipment, buildings, vehicles, and machinery as part of their operations. These companies in accordance with accounting rules must depreciate these assets over their useful lives. Due to this, companies have to recognize accumulated depreciation, as the sum of depreciation expenses recognized over the life of an asset. Hence, the accumulated depreciation is reported as a contra asset on the balance sheet that reduces the net book value of the capital asset section.
Being recognized as the total depreciation that is reduced from the value of an asset; is accumulated depreciation an asset? In this article, we will discuss assets and accumulated depreciation to decipher if accumulated depreciation is an asset.
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What is an asset?
An asset is a thing of value or resource that is owned by an individual, corporation, or country with the expectation that it will yield future benefits. Assets are listed on the balance sheet of a company and are classified as current, fixed, financial, and intangible assets. They are created or purchased to increase the value of a business and benefit its operations. Generally, an asset is anything of economic value that can generate cash flow, improve sales or reduce expenses.
An asset is something that may be scarce and has the ability to generate cash inflows or decrease cash outflows in order to produce economic benefit. It provides a current, future, or potential economic benefit for an individual or company. However, in order for an item to be considered an asset, the company must possess a right to it as of the date of the company’s financial statements.
Typical examples of assets include cash, real estate, inventory, vehicles, long-term investments, accounts receivable (unpaid invoices from customers), furniture, properties, equipment, patents, or trademarks. etc. Also, if a company loans money out, that loan is considered an asset because the company is owed that amount.
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What is accumulated depreciation?
Accumulated depreciation is the total depreciation that is reduced from the value of an asset, which is recorded on the credit side to offset the balance of the asset. This is not the same thing as depreciation expense. The depreciation expense is the amount that has been depreciated for a single period whereas accumulated depreciation is the total amount of depreciation of a company’s assets.
That is, the accumulated depreciation is the total amount of an asset’s cost that has been allocated as depreciation expense since the time that the asset was put into use. It specifies the total amount of an asset’s wear to date in the useful life of the asset. Therefore, as depreciation expenses continue to be recorded, the amount of accumulated depreciation for an asset or group of assets will increase over time.
The accumulated depreciation account on a company’s balance sheet is recorded as a contra asset account and therefore represents a credit balance. Even though accumulated depreciation is reported on the balance sheet under the asset section, it reduces the total value of assets recognized on the financial statement. As a contra asset account, it is a natural credit balance whereas assets are natural debit accounts.
Accumulated depreciation is used to calculate the net book value of an asset, which is the value of an asset carried on the balance sheet. The formula for the net book value of an asset is the cost of an asset minus accumulated depreciation. This means that accumulated depreciation cannot exceed the cost of an asset. Therefore, the accumulated depreciation associated with an asset will be reversed when that asset is eventually sold or put out of use, thus, eliminating all records of the asset from the company’s balance sheet.
Take, for instance, a machine purchased for $15,000 will be reported on the balance sheet as Property, Plant and Equipment for $15,000. The machine decreases in value by the amount of depreciation expense over the years. This machine in the second year will show up on the balance sheet as $14,000. But the fact is that the machine doesn’t really decrease in value until it is sold. So, this asset shows up in two different accounts which are the asset’s depreciated cost and the accumulated depreciation. Now, the total of these two accounts is the original cost of the machine (asset) and the difference between the two accounts is the book value of the asset.
Therefore, the value of an asset on the balance sheet is expressed as the cost of the asset minus accumulated depreciation equals the book value of that asset.
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Is accumulated depreciation an asset on the balance sheet?
Accumulated depreciation is the total decrease in the value of an asset on the balance sheet over time. In as much as accumulated depreciation is reported within the asset section of a balance sheet, it is not an asset. It is rather reported on the balance sheet as a contra asset that reduces the book value of an asset. Accumulated depreciation usually has a natural credit balance, unlike assets that have a natural debit balance.
Because accumulated depreciation is recorded in a contra asset account, it will have a credit balance, that reduces the gross amount of the fixed asset. Therefore, accumulated depreciation is not recorded as an asset or liability. It is said to be a contra asset account because it has a negative balance that is intended to offset the asset account with which it is paired, which results in a net book value.
Accumulated depreciation is not an asset but appears on the balance sheet as a reduction from the gross amount of fixed assets reported. It cannot be considered an asset because the balances stored in the account are not something that will produce economic value to the business over multiple reporting periods. Rather the account actually represents the amount of economic value that has been consumed in the past.
Since accumulated depreciation is neither an asset nor a liability, it is separately deducted from the asset’s value and treated as a contra asset so as to offset the balance of the asset. Depreciation is treated every year as an expense and debited to the profit and loss account.
Accumulated depreciation is a contra asset
A contra account is reported on the same financial statement as the associated account. It is used in a general ledger to reduce the value of a related account when the two are netted together. Hence, the natural balance of a contra account is the opposite of the associated account. This means that if a debit is a natural balance recorded in the related account, the contra account records a credit. This is why the natural balance for accumulated depreciation (contra account) is a credit, and the natural balance for a fixed asset is a debit.
Contra asset, contra liability, contra equity, and contra revenue are the four main types of contra accounts. The contra asset accounts include allowance for doubtful accounts and the accumulated depreciation. These accounts are recorded with a credit balance that decreases the balance of an asset. Accumulated depreciation as a major example of contra account reduces fixed and capital asset balances. When accounting for assets, the book value is, therefore, the difference between the asset’s account balance and the contra account balance.
In order to keep financial accounting records clean, accountants make use of contra accounts rather than reducing the value of the original account directly. Without the use of a contra account, it can be difficult to determine historical costs. This can make tax preparation more difficult and time-consuming. Therefore, the financial information is more transparent for financial reporting purposes when the original dollar amount is kept intact in the original account and the figure in the separate account is reduced. This is why, when a piece of heavy machinery is purchased, say for $10,000, the $10,000 figure is maintained on the general ledger and the asset’s depreciation is recorded separately.
Why accumulated depreciation is not an asset or liability
Is accumulated depreciation an asset or liability? Accumulated depreciation is not an asset or liability but a contra asset. It is not considered an asset because it does not produce the company’s economic value and shows the credit balance. Compared to assets that show debit balance and represent something that will produce economic value to the company over the past.
Accumulated depreciation is not also considered a liability because it is not a payment obligation to an entity, rather, it is created for internal and valuation purposes. Compared to liability which represents the obligation to pay.
Therefore, accumulated depreciation is treated as a contra asset, which means that it contains a negative balance that is used to offset the asset. As a result, it is classified separately from the normal asset or liability account.
Is accumulated depreciation an asset? Accumulated depreciation is the total decrease in the value of an asset that is levied due to the continuous usage of assets or devaluation of assets over time or as a result of the introduction of new technologies.
Though there are mixed views about whether accumulated depreciation is an asset or liability, industry experts and experienced professionals are of the conclusion that accumulated depreciation is neither an asset nor a liability.
Accumulated depreciation is not an asset as it does not produce economic benefit and is not a liability as it is not an obligation towards a third party. Rather, it is treated as a contra asset that offsets the balance of the asset. Therefore, it is shown separately from assets and liabilities as accumulated depreciation in long-term assets against the reduction from the book value of the asset.
See also: Common stock: asset or liability?Last Updated on November 2, 2023 by Nansel Nanzip Bongdap
Obotu has 2+years of professional experience in the business and finance sector. Her expertise lies in marketing, economics, finance, biology, and literature. She enjoys writing in these fields to educate and share her wealth of knowledge and experience.