Is Accumulated Depreciation a Liability Account?

Accumulated depreciation is an accounting classification that reduces the value of certain depreciable asset categories. As a result, accumulated depreciation is termed a contra-asset. These balance sheet accounts are closely related to an income statement account, depreciation, which measures the value of depreciation expense during a given period.

Concept

Depreciation is an accounting concept measuring the reduction in value of fixed assets, such as buildings, equipment, land improvements and vehicles. The value of these fixed assets becomes reduced as these assets wear and experience use. Depreciation is an estimate and is measured over the projected useful life of these assets. Some assets, such as land, are typically not depreciated under Generally Accepted Accounting Principles, commonly called GAAP, in the United States, as they are not anticipated to decrease in value.

Measurement

Depreciation is measured based upon the cost of the fixed asset, the estimated useful life of the fixed asset, the method of depreciation, and any residual value of the asset after the useful life has expired. The estimated useful life of a fixed asset may be measured in a period of time, typically years, or may be measured in units of production, such as miles driven for a vehicle. There are several different mathematical depreciation methods allowed under GAAP. Regardless of the method used, an annual amount of depreciation expense is assigned to all fixed assets in service.

Accumulated Depreciation

The total amount of depreciation expense that has been attributed to an asset is known as that asset's accumulated depreciation. On the balance sheet, total fixed assets are typically reported reduced by the value of total accumulated depreciation. This reporting is known as "net of." Since accumulated depreciation reduces the value of assets, it is known as a contra-asset.

When a fixed asset is removed from service, whether through sale or by reaching the end of its useful life, both the asset and the total accumulated depreciation are removed from the company's financial books and records.

Taxation

Although the basic concepts are the same, tax treatments for depreciation typically differ from GAAP treatment. In the United States, the IRS specifies asset classes and depreciation methods that companies must use. Asset classes are standardized estimated lives for different types of assets. Depreciation methods are guidelines for the portion of an asset's value that can be claimed as a depreciation expense in a given year. The most commonly utilized IRS depreciation method is known as the Modified Accelerated Cost Recovery System, or MACRS.

Amortization

While depreciation and accumulated depreciation are used for tangible assets in accounting, amortization and accumulated amortization are used for intangible assets. Amortization and accumulated amortization are calculated much the same as their tangible asset counterparts and are typically used for assets such as patents, computer software or loan reduction payments.

References

• American Institute of Professional Bookkeepers: Depreciation Under GAAP
• IRS.gov: Publication 946, How to Depreciate Property