How to Remove Accumulated Depreciation

Accumulated depreciation adjusts the carrying value of an asset on the company's balance sheet until the asset is fully depreciated.

When a business purchases a piece of equipment, it has several decisions to make beyond the purchase price. Management must decide the usable service life of the asset for accounting purposes and charge it to a non-cash expense called depreciation. Management uses its best estimate to determine the useful life of an asset and has a choice of three depreciation methods: straight-line, double declining balance and sum-of-the-year's digits. Accumulated depreciation accounts for use of the asset until it has zero value, referred to as fully depreciated or a write-off.

Instructions

1. Debit depreciation expense and credit accumulated depreciation for the same dollar amount to account for use of the asset. For example, if you purchased an asset for $10,000 with an estimated useful life of 10 years, using the straight-line depreciation, the annual depreciation is $1,000. The journal entry in Year 1 is debit depreciation expense for $1,000 and credit "accumulated depreciation" for $1,000. The beginning balance sheet value is $10,000; however at the end of the year, the value of the asset is $9,000 because of accumulated depreciation of $1,000. In year two accumulated depreciation is $2,000 and the value of the asset is $8,000.

2. Adjust the book value of the asset on the balance sheet by deducting the current year's accumulated depreciation from the original purchase price. For example, at the end of year one the balance sheet shows equipment value of $10,000 less accumulated depreciation of $1,000 -- a net value of $9,000.

3. Charge the final year depreciation expense on the income statement of $1,000. On the balance sheet, accumulated depreciation is $10,000. The asset is fully depreciated and its value is zero. For example, the asset's carry value of $10,000 net of accumulated depreciation of $10,000 shows zero.

4. Make a final journal entry to write off the asset. Debit accumulated depreciation $10,000 and credit equipment for $10,000.

References

• Accounting Coach; Depreciation; Harodl Averkamp
• AccountingInfo: Depreciation Methods
• Small Business Finance Tips: Depreciation Expense and Accumulated Depreciation
• Oblivious Investor: How To Calculate Depreciation Expense