Accumulated Depreciation on Your Business Balance Sheet

Accumulated Depreciation on Your Business Balance Sheet

Accumulated Depreciation on a Business Balance Sheet
••• Accumulated Depreciation on a Business Balance Sheet. Rae Swan/Getty Images

What is Accumulated Depreciation? 

Depreciation is a complicated term, but it's important to businesses. Depreciation is a method for spreading out the cost of a business asset  (machinery, equipment or vehicles, for example) over the time the asset is being used. 

Accumulated depreciation is the total decrease in the value of an asset on the balance sheet of a business, over time.

Business Assets on a Balance Sheet

Look at the balance sheet of a business. On the left side are business assets, things (tangible and intangible) that have a value that can be counted. 

Scroll down the list of assets until you come to business property. It's typically shown as "Property, Plant, and Equipment (PP&E)." (This asset category doesn't include land or buildings, which are separate.)

PP&E is items like machinery, vehicles, and furniture, that have a lasting value. The cost of these items can't be taken as a tax deduction in one year, but must be spread out over the useful life of that asset. This spreading out of cost over several years is depreciation. 

Accumulated depreciation is an accounting entry. It is taken care of my your accountant and included in the end-of-year accounting adjustments for your year-end balance sheet. Although accumulated depreciation is not something you need to worry about from day to day, it's important to know how it works in your business accounting system. 

Depreciation Expense and Accumulated Depreciation

Let's say you have a machine used in your business that has a value of $10,000. It depreciates over 10 years, so you can take $1000 in expense each year. 

This depreciation expense is taken along with other expenses on the business profit and loss report. As the asset ages, accumulated depreciation increases.

Accumulated Depreciation on a Balance Sheet

The value of all assets of each type are considered together on the balance sheet, rather than each individual asset. That machine is in there somewhere.   

On the balance sheet, an asset that is new will have no accumulated depreciation. The $10,000 machine will show up on the balance sheet (included in Property, Plant, and Equipment) as $10,000.     

But over the years, the machine decreases in value (cost) by the amount of depreciation expense. In the second year, the machine's value will show up on the balance sheet as $9,000.   

Here's the tricky part. The machine doesn't really decrease in value - until it's sold. So the asset show up in two different accounts: (1) the asset's depreciated cost, and (2) accumulated depreciation. The total of the two is the original value (cost) of the asset. The difference between the two is the book value of that asset.   

The value of assets on the balance sheet is expressed as:

  • Cost of asset
  • Less accumulated depreciation
  • Equals the book value of that asset.

An Example of Accumulated Depreciation on a Balance Sheet

On the balance sheet of the company on December 31, 2015:

  • Cost of Equipment $239,000
  • Less Accumulated Depreciation $100,000
  • Book Value of Equipment $139,000

Accumulated Depreciation and Your Business Taxes 

You won't see "Accumulated Depreciation" on a business tax form, but depreciation itself is included, as noted above, as an annual expense on the business profit and loss report. 

Accumulated Depreciation and the Sale of a Business Asset

When you sell an asset, like the machine discussed above, it takes the asset and the amount of accumulated depreciation for that asset, off the balance sheet. Since the original cost of the asset is still shown on the balance sheet, it's easy to see what profit or loss has been recognized from the sale of that asset.