What Is the Classification of Normal Balance of Accumulated Depreciation?
If you comb through a balance sheet, you see the accumulated depreciation account lying right underneath the corresponding fixed asset. This is why finance people call it a contra-account, given the decremental effect it has on the tangible resource's balance. In a financial glossary, terms such as "fixed asset," "tangible resource" and "capital asset" mean the same thing.
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Depreciation
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Accumulated depreciation draws on the concept of depreciation, which requires that a business spread the cost of a capital asset over several years to match revenue the resource will bring in company coffers during the useful life. The last item is what accountants call the depreciable period, also known as operating life. Capital assets, or depreciable resources, include commercial buildings, residential settings, computer gear and machinery. Although land is a tangible resource, it's not depreciable because it typically doesn't lose value over time.
Financial Accounting and Reporting
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To allocate the cost of a fixed resource -- the same thing as depreciating a capital asset -- a corporate bookkeeper debits the depreciation expense account and credits the accumulated depreciation account. As a contra-account, the last item is part of the "property, plant and equipment" master account, which is integral to a statement of financial position -- also referred to as a balance sheet or report on financial condition. Depreciation expense goes on a statement of profit and loss, the name accountants often give to an income statement, or P&L.
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Contingency Operating Process
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The accumulated depreciation account doesn't apply only to operating assets -- those a business relies on everyday to exist commercially, make money and settle commitments. The organization may buy other equipment to beef up its contingency operating process, the kind that helps it weather an internal crisis -- such as a fire wreaking havoc at a major plant -- or an external emergency, such as power outage in a state, county or larger geographical expanse. Contingency equipment, or backup machinery, includes mainframe servers, backup and disaster recovery gear, and electricity generating sets. All these items are depreciable, and accountants accrue depreciation on them the same way they do for operating items. In a modern economy in which organizations often operate on a 24/7 basis, a business must be able to quickly deploy proper technology to run efficient activities. This is especially relevant in industries as central to the economy as banking, utilities and mass transportation.
Financial Implications
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Accumulated depreciation affects other financial reports although it's only part of a balance sheet. Depreciation expense decreases a company's net income, which ultimately feeds a statement of changes in shareholders' equity -- also known as a retained earnings statement or equity report.
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