How to Define Accumulated Depreciation

Company asset

Keeping track of your company’s assets is an important part of the accounting function. When assets are sold or disposed of, the company realizes a profit or a loss for the asset's disposal. That profit or loss is calculated by taking the purchase price of the asset and subtracting the accumulated depreciation plus the sale or salvage price, if any. If the value left after the calculation is negative, the company realizes a loss. If the value left is a positive number, the company must show a financial gain. How does a company define accumulated depreciation?

Things You'll Need

• Spreadsheet software
• Yearly depreciation taken for each asset
• Length of time asset has been owned

Instructions

1. Record purchased assets in the company books. The purchase is expensed unless the purchase price was small enough for the asset to be considered a supply. Once the purchased asset is entered into the company's accounting records as an asset, a determination is made about the type and length of depreciation and the salvage value at disposal.

2. Determine the length of depreciation to be used. Equipment such as a machine used in assembly is usually depreciated over a 7-year period.

3. 

   Determine the type of depreciation to be used. Equipment, such as a machine used in assembly, is usually depreciated using an accelerated depreciation method. Some types of depreciation used are the Straight Line Depreciation method, Double Declining Balance Depreciation, and the Modified Accelerated Cost Recovery System (MACRS.) MACRS is usually used because assets tend to lose most of their value during the first year of ownership.

4. Calculate the amount to be depreciated. Subtract the suggested salvage value from the purchase price. The amount left will be depreciated over the asset's suggested useful life as determined by the IRS.

5. Define the accumulated depreciation by how long the asset has been owned. Look at the company's asset records. Find the asset for which you want to know the accumulated depreciation. Add the depreciation taken on the books since the purchase date of the asset through the current period. For example, if the asset was purchased 3 years ago, you would need to add three numbers--one for each year--to find the accumulated depreciation. The first year of depreciation is based on owning the asset for half a year, regardless of the month of purchase. The depreciation for the year the asset is disposed of is also based on half a year, regardless of the month of the disposal.

6. Reduce the current value of the assets on the balance sheet by the accumulated depreciation calculated. The depreciation reflects the loss of the assets' values due to usage, wear and tear.

Tips & Warnings

• Assets replaced may have their final value added to the new asset purchased for depreciation purposes.

• The IRS is very strict about depreciation schedules used.