Accumulated depreciation is the running total of all the depreciation charged on an asset, or a group of assets, since it was placed in service. It is held in a contra-asset account: the asset account keeps showing the original cost, and accumulated depreciation sits against it with a credit balance. Cost minus accumulated depreciation gives the asset's net book value (NBV).
Each period's depreciation charge does two things. It is an expense in the profit and loss account for that period, and it adds to accumulated depreciation on the balance sheet. The expense starts again from zero each year; accumulated depreciation keeps growing until the asset is fully depreciated or leaves the business.
Is accumulated depreciation an asset or a liability?
Neither, strictly. It is a contra-asset: an account that reduces an asset. It has a normal credit balance, like a liability, but it is not an amount the business owes anyone and it is not a fund of cash. It is reported in the assets section of the balance sheet, as a deduction from property, plant and equipment.
| Item | Depreciation expense | Accumulated depreciation |
|---|---|---|
| Type of account | Expense (income statement) | Contra-asset (balance sheet) |
| Normal balance | Debit | Credit |
| Covers | The current period only | Every period since the asset went into service |
| At year end | Closed to profit, starts again at zero | Carried forward and keeps growing |
Worked example with journal entries
A delivery van costs $40,000. The business expects to use it for 6 years and sell it for about $4,000, so it depreciates $36,000 straight-line: $6,000 a year.
| End of year | Depreciation expense | Accumulated depreciation | NBV |
|---|---|---|---|
| 1 | $6,000 | $6,000 | $34,000 |
| 2 | $6,000 | $12,000 | $28,000 |
| 3 | $6,000 | $18,000 | $22,000 |
| 4 | $6,000 | $24,000 | $16,000 |
| 5 | $6,000 | $30,000 | $10,000 |
| 6 | $6,000 | $36,000 | $4,000 |
Accumulated depreciation on the balance sheet
At the end of year 3 the van appears like this:
What happens on disposal
When an asset is sold, scrapped or written off, its cost and its accumulated depreciation are both removed. Suppose the van is sold at the end of year 4 for $15,000, when accumulated depreciation is $24,000 and NBV is $16,000:
Examples by sector
- Hospital: accumulated depreciation ÷ cost across imaging equipment shows how far the class is through its life, a prompt for the replacement budget.
- Construction: a plant fleet where each excavator carries its own accumulated depreciation, so a sale or trade-in removes the right figure.
- School or university: classroom IT where accumulated depreciation by building shows which sites need a refresh first.
Common mistakes
- Crediting the asset account directly. Netting depreciation off cost loses the original investment figure that auditors and insurers ask for.
- Leaving it behind on disposal. Removing cost but not accumulated depreciation leaves a negative balance in the ledger.
- Depreciating past salvage value. Accumulated depreciation should never exceed cost minus salvage value.
- Not reconciling. The total in the fixed asset register should agree with the general ledger control account each period.
Spreadsheet vs software
In Excel or Google Sheets, accumulated depreciation is a running-total column: last period's figure plus this period's charge, capped at cost minus salvage. That works for a few dozen assets. It breaks down with mid-year purchases, changed estimates and disposed assets whose rows stay in the sheet. Software calculates each asset's charge from its own dates and method and clears the balances on disposal. The free depreciation schedule generator builds the year-by-year table, accumulated column included.
Accumulated depreciation in Asetavo
In Asetavo (Business plan) each asset holds its cost, residual value, method and accumulated depreciation. Depreciation runs are computed as drafts; only a posted book run adds to accumulated depreciation and reduces NBV, and NBV never drops below residual value. Disposals record gain or loss against the NBV at that date. Cost and NBV can be exported to Excel or CSV to reconcile with your ledger. See Asetavo depreciation.
