What Does Balance Represent in Accumulation Depreciation?
In accounting, the value of a fixed asset is depreciated over the useful, economic life of the asset. The total amount of depreciation that has been taken out of an asset's original value since the asset purchase is reported in the account of accumulated depreciation. The balance in accumulated depreciation is the sum of the depreciation expenses from all previous accounting periods. Accumulated depreciation is a balance-sheet account and contra to the asset account itself; thus, it reduces the carrying value of the asset over time.
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Asset Original Cost
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An asset's original cost, or value, is the purchase price of the asset. After an asset purchase, companies record a capital, or fixed, asset on the balance sheet with a value in the amount of the purchase price, rather than reporting an expense of the asset's total purchase cost in the income statement. However, as the asset's original value is reduced over time through asset depreciation, the amount of depreciation allocated during each accounting period is then reported as an expense from the asset use in the income statement.
Depreciation Expense
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Depreciation expense is the result of asset cost allocation over total accounting periods during the time when an asset is placed in service. The accrual-based accounting does not allow the total cost of an asset be expensed in a single accounting period, because such one-time expensing violates accounting's cost matching principle. An expense charge from an asset use should be accrued to a particular accounting period only in the amount that matches the amount of expected benefit from the asset use for the same accounting period.
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Accumulated Depreciation
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While depreciation expense is a debit account for the income statement, accumulated depreciation is a credit account in the balance sheet. At the end of an accounting period, when asset cost allocation is appropriately charged to the period, companies record an increase to the account of depreciation expense and an increase to the balance in the account of accumulated deprecation. For each accounting period, the depreciation expense is added to the existing balance of the accumulated depreciation.
Asset Carrying Value
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As a credit account, accumulated depreciation is not listed on the credit side, or the right side, of the balance sheet, where credit accounts, namely all liability and equity accounts, should be listed. Instead, the account of accumulated depreciation is listed on the left side of the balance sheet below its related asset account to serve as a contra, or negative, balance to the related asset's reported original cost balance. As depreciation expense is charged against an asset's value and accumulates over time, the total amount of depreciation, or accumulated depreciation, reduces the asset's original cost to its current carrying value.
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