How to Compute Accumulated Depreciation

Use the straight line method to compute accumulated depreciation.

Depreciation is a noncash accounting transaction that is meant to write off the value of assets over time due to usage. Accumulated depreciation is the contra account used to hold the value of depreciated assets on the balance sheet. The value of accumulated depreciation depends on the useful life of the asset, the cost of the asset and the depreciation methodology used. Straight line depreciation is the most commonly used methodology due to its ease of use.

Instructions

1. Determine the cost of the asset. This may differ from the value of the asset. For instance, if you pay $10,000 for a computer valued at $15,000, the cost you use to compute accumulated depreciation is $10,000.

2. Determine the useful life of the asset. This is the number of years the asset will bring value to your business. For instance, let's say the computer has a useful life of 2 years.

3. Calculate annual depreciation expense and first-year accumulated depreciation. Divide the cost of the asset by the useful life. The calculation is $10,000 divided by 2, or $5,000. The annual depreciation expense is $5000, which is also the value of the first year of accumulated depreciation. The accumulated depreciation account holds the part of the asset value which has been written off.

4. Calculate total depreciation in year 2 . While depreciation expense remains the same every year, the total is cumulative, like the accumulated depreciation account. It is the depreciation expense from year 1 plus the depreciation expense for year 2. The calculation is $5,000 plus $5,000, which equals $10,000. The total value of the computer is now written off and valued at $0 on the balance sheet.

5. Calculate year 2 accumulated depreciation. Add year 2 depreciation to year 1 accumulated depreciation. The calculation is $5,000 plus $5,000, or $10,000. The accumulated depreciation account now holds the full value of the written-off asset which is why it is referred to as a contra account.

References

• Accounting Coach: Accumulated Depreciation