While you are following efficient ways to carry out your business in a way that grows your valuation, you have to deal with your business assets and the drop in their value over a specific period of time. In accounting, this struggle refers to accumulative depreciation. Wondering for the understanding of what is accumulative depreciation?
In simple put accumulative depreciation refers to the life span of a business asset. The asset you purchase to carry out your business smoothly does not maintain the same value for a very long time. Eventually, it drops its value after a specific time period. There is no escape for the owner who has to struggle with it.
However, this comprehensive guide carries some solutions for such a problem. We will cover the basic understanding of accumulative depreciation, ways to calculate accumulated depreciation, and what is the type of account that is considered accumulative depreciation.
What is Accumulated Depreciation
There must be a link between the expense listed by a business and related revenue as per the instructions of Generally Accepted Accounting Principles (GAAP) UK. In this time period of accounting, this matching of expense and related revenue must be part of the balance sheet records.
Businesses tend to add the capital asset’s value as an expense and it is possible because of depreciation. While the life span of an asset gives a business the opportunity to generate revenue, the cost while using the asset must be part of the records as well. Here comes the need for accumulated depreciation. This process will help to explain the depreciated amount of an asset.
In the following, we will have a detailed explanation related to the calculations and we will start with the accumulated depreciation account.
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Type of Account – Accumulated Depreciation
It will not be wrong if we consider the contra asset account refers to accumulative depreciation. The reason behind this is the balance of such accounts that is a credit and it works to limit the value of an asset in a specific time period. The clear difference is received when you compare the historical cost and accumulated depreciation on a balance sheet as well.
As this is the document where the values of assets are clearly listed. Also when an asset come towards the end of its life span, the salvage value and the asset’s current value will match. Therefore, the depreciation is calculated by following the simple formula:
Total Depreciation=Initial Cost – Salvage Value
Furthermore, in the accounting period, the expense of depreciation is also part of the record. It is a part of the accumulated depreciation balance on the document. Contra asset account refers to accumulated depreciation as mentioned earlier. In order to maintain the long term records, depreciation expense is debited and accumulated depreciation value is credited.
Certain facts about the process are important to note and they are listed as:
- When it is time to maintain records, depreciation expense is part of the income statements.
- On the other hand, accumulated depreciation she part of the balance sheet.
- The balance will appear to be increased as you add depreciation expense with a specific time period.
Learn To Calculate Accumulated Depreciation
Plenty of ways are identified to help you to know how to calculate accumulated depreciation. Normally people find to easy to calculate accumulated depreciation every month. In the following details, depreciation calculation methods are discussed, you can pick anyone for yourself as per your convenience.
- Sum of The year Digit
- Declining Balance Method
- Straight Line Method
Sum of The years’ Digit: A popular way to calculate accumulated depreciation is by using this method SYD ( Sum of The years’ Digit) and the formula of this method is:
Depreciation Expense = (Remaining Useful Life / Sum of The Years’ Digits) x Depreciable Cost
As you see that you need to calculate the sum of the years, the projected life which was useful is needed to know where to add together and get the required figure.
Declining Balance Method: A very suitable way to calculate accumulated depreciation is the declining balance method. Just like the asset examples vehicle and electronics, all the assets are of most use when they are new. Due to this fact, the amount of depreciation varies every year. The related formula for the declining balance method is:
Annual Depreciation = Depreciation Factor x (1/Lifespan) x Remaining Book Value
Straight Line Method: This method needs the details mentioned in the formula:
Annual Depreciation = Depreciation Factor x (1/Lifespan) x Remaining Book Value
This formula is suitable for a month to month depreciation calculations. See the following steps:
- The asset’s salvage value will be subtracted from the total cost. This will give a clear picture of the depreciated value.
- The value then is further divided by the number of life span years of the asset.
- To receive the value of monthly depreciation, the figure will be divided by 12.
Regardless of which method you find suitable to calculate the accumulated depreciation, almost the same basic details are asked to be put in the formula. Which involves the following:
- Cost of the asset
- The salvage value
- The useful life span of the asset
Our young and qualified team is ready to provide efficient ways to deal with accumulated depreciation. If you are interested to speak to one of our professionals, we are available from 9:00 am – 05:30 pm Monday to Friday.
The Bottom Line
As the basic information related to what is accumulated depreciation is gathered, the discussion is coming toward wrapping up. There are several simple ways to calculate accumulated depreciation, however, the important part to focus on is that your records are well maintained. This will bring you to the easy way to find relevant details required in the formula and simply put to have your results.
In case the required information is not managed well, the process can become complicated and cause harmful consequences to your business growth.
Disclaimer: The information about what is accumulated depreciation provided in this article is general in nature. It does not intend to disregard any of the professional words.
