Accumulated Depreciation on Your Business Balance Sheet
An Example of Accumulated Depreciation and Asset Value
What is Accumulated Depreciation?
Depreciation is a complicated term, but it's important for businesses because it affects both the business balance sheet and taxes. 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.
Why You Need to Know About Accumulated Depreciation
Accumulated depreciation is the total decrease in the value of an asset on the balance sheet of a business, over time. The cost for each year you own the asset becomes a business expense for that year. This expense is tax-deductible, so it reduces your business taxable income for the year.
The value of the asset on your business balance sheet is called its book value - the original cost minus accumulated depreciation. Book value may (but not necessarily) be related to the price of the asset if you sell it.
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 the line for business property. It's typically shown as "Property, Plant, and Equipment (PP&E)." Business property - land and buildings are different. The value of land as an asset is never depreciated because land never loses its value. But other property, including buildings, equipment, and vehicles, is depreciated.
PP&E includes property 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 by your accountant and included in the end-of-year accounting adjustments for your year-end balance sheet.
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.
Accumulated Depreciation on a Balance Sheet
The values 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 shows 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, 2018:
- 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 expense on the business profit and loss report. The good news is that depreciation is a "non-cash" expense. You can count it as an expense to reduce the income tax your business must pay, but you didn't have to spend any money to get this deduction.
What shows up on your business tax form is the amount of depreciation expense that was taken for the year, including all types of depreciation on all business property. For example, on a Schedule C for a sole proprietor business, Line 13 under Expenses says, "Depreciation and Section 179 deductions...." That's where you will see the total of all depreciation taken during the year.
You can also accelerate depreciation legally, getting more of a tax benefit in the first year you own the property and put it into service (begin using it). The extra amounts of depreciation include bonus depreciation and Section 179 deductions. These amounts change each year, so check with your tax preparer.
Accumulated Depreciation and the Sale of a Business Asset
When you sell an asset, like the machine discussed above, the book value of the asset and the accumulated depreciation for that asset are removed from 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.
Depreciation and book value may have an effect on the