Where is accumulated depreciation on the balance sheet? Accumulated depreciation is treated as a long-term contra asset and is therefore found in the fixed asset section of the balance sheet; sometimes categorized under the heading property, plant, and equipment.
Balance sheets are important financial documents that include detailed information about a company’s assets and their original and present value. The accumulated depreciation on the balance sheet 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 this article, we will discuss balance sheets and accumulated depreciation in order to answer the FAQ- where is accumulated depreciation on the balance sheet?
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Understanding balance sheet
A balance sheet is a financial statement that provides a report of a company’s financial activities at a particular point in time during an accounting period. It shows a summary of the assets, liabilities, equity, and other financial activities of a company during any accounting period. Therefore, the balance sheet is an important document for the financial and business management of a company. It gives a summary of the financial standing of a firm at a particular point in time and as a result is also known as a statement of financial condition.
Balance sheets are useful because it helps investors, owners, auditors, accountants, etc to track the earnings and spending of a company. Apart from the balance sheet, other financial statements include the income statement and the cash flow statement. There are three major components included in a balance sheet. They include:
- Assets: These are the things of value that the company owns. They could be physical (tangible assets), non-physical (intangible assets), current assets (can be converted to cash within a year), or fixed assets (not likely to be converted quickly into cash).
- Liabilities: These are the debts or financial obligations that a company owes. There are two types such as current liabilities (amounts due to be paid within twelve months) and non-current liabilities (amount not due for more than a year).
- Equity: This could be owner’s equity or stockholder’s equity depending on whether the company is a private or public company respectively. Equity is the amount of money that the owner or shareholders have put into the business.
These three accounts form the balance sheet equation which is expressed as:
Assets = Liabilities + Equity
According to the balance sheet equation or accounting equation, the total amount in all assets accounts must be equal to the total amount in all liabilities and equity accounts. Anything otherwise indicates an imbalanced account.
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What is accumulated depreciation on the balance sheet?
Accumulated depreciation is the total amount of an asset’s depreciation in its useful life. It is recorded on the credit side of a journal to offset the balance of the asset. This specifies the total depreciation that is reduced from the value of an asset. Therefore, accumulated depreciation is reported as a contra asset on the balance sheet, reducing the net book value of the capital asset section.
Many companies depend on capital assets such as land, equipment, furniture, property, buildings, vehicles, fixtures, and machinery as part of their operations. These assets tend to lose value over time due to factors such as wear and tear, technology updates, etc. As they depreciate, their value drops because the company cannot sell them at a price that is close to their original cost. Therefore, in accordance with accounting rules, companies must depreciate these assets over their useful lives. Due to this, companies recognize accumulated depreciation, as the sum of depreciation expenses recognized over the life of an asset.
The amount that has been depreciated for a single period is the depreciation expense while the total amount of the depreciation expense of the assets is the accumulated depreciation.
This means that accumulated depreciation is the total amount of an asset’s cost that has been allocated as depreciation expense from the time that the asset has been put into use. That is, the amount of accumulated depreciation for an asset or group of assets will definitely increase over time as depreciation expenses continue to be recorded.
Therefore, depreciation expense appears as an expense on the income statement while accumulated depreciation is a contra asset reported on the balance sheet.
Accumulated depreciation is calculated for long-term capital assets that can be sold for money. Such assets are not frequently replaced and tend to depreciate over time. Therefore, accumulated depreciation is not calculated and does not apply to short-term or current assets that the company frequently buys and replaces, such as office supplies.
Accumulated depreciation is used to calculate the net book value of an asset- this is the value of an asset carried on the balance sheet. Therefore, the net book value of an asset is expressed as the cost of an asset minus accumulated depreciation. Meaning that accumulated depreciation cannot exceed the cost of an asset. As a result, when an asset is eventually sold or put out of use, the accumulated depreciation associated with that asset will be reversed, thereby, eliminating all records of the asset from the company’s balance sheet.
For example, a piece of equipment purchased for $20,000 will be reported on the balance sheet as Property, Plant and Equipment for $20,000. Say, the equipment decreases in value by the amount of depreciation expense over the years. This equipment in the second year will show up on the balance sheet as $19,000. But the fact is that the equipment doesn’t really decrease in value until it is sold. So, the equipment as an asset will show up in two different accounts which are the asset’s depreciated cost and the accumulated depreciation.
The total of the depreciated cost and the accumulated depreciation will give the original cost of the equipment (asset) and the book value of the asset will be the difference between the two accounts. Therefore, on the balance sheet, the value of an asset is expressed as the cost of the asset minus accumulated depreciation which equals the book value of that asset.
What type of account is accumulated depreciation on the balance sheet?
On the balance sheet, the accumulated depreciation account is recorded as a contra asset account and thereby represents a credit balance. It is reported on the balance sheet under the asset section and reduces the total value of assets recognized on the financial statement. Being a contra asset account, accumulated depreciation is a natural credit balance while the assets that it reduces are natural debit accounts.
Contra asset accounts have zero or negative account balances. However, they also account for assets equalizing and balancing one another out to attain a net value. The accumulated depreciation account will show the previous company purchases to indicate previous and current economic value.
Accumulated depreciation as a contra asset account will definitely evolve as long-term fixed assets depreciate in value. The company, therefore, records these changes on their balance sheet as the changes are likely to reduce the company’s gross fixed assets.
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Where is accumulated depreciation on the balance sheet?
Accumulated depreciation is recorded as a contra asset and presented on the balance sheet just below the related capital or fixed asset line. It has a natural credit balance as opposed to the related asset accounts that have a natural debit balance. Accumulated depreciation is usually found below where the related capital or fixed assets is listed on the balance sheet.
In a balance sheet, all the company’s assets are listed and each is categorized by the type of asset. Since accumulated depreciation only applies to fixed assets and not current assets, it will be in the section of the balance sheet detailing all the fixed assets that the company owns.
Some companies usually include a PROPERTY, PLANT AND EQUIPMENT section specifically for these assets in order to further separate them from the general cash section. So the accumulated depreciation is categorized under the heading Property, plant, and equipment.
The excerpt of the Amazon balance sheet below is an example of how accumulated depreciation is categorized under the heading PROPERTY, PLANT AND EQUIPMENT:
In some balance sheets, long-term assets are grouped and the accumulated deprecation is provided as one whole amount. For some balance sheets, each line on a balance sheet includes the original cost of the asset, the accumulated depreciation amount and the book value of the item.
The excerpt of Exxon’s balance sheet from its 10K statement (page 74) below is an example of how some balance sheets group long-term assets and provide the accumulated deprecation as one whole amount:
However, it is always best to still list the accumulated deprecation line-by-line for each asset in order to make the most accurate record-keeping. This gives the most accurate representation of the company’s financial health because it details the most valuable assets.
See also: Is revenue an asset or equity?Last Updated on November 8, 2023 by Nansel Nanzip Bongdap
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