The Normal Balance of Accumulated Depreciation
Companies use fixed assets in the ongoing operation of their businesses. Fixed assets refer to large, physical assets that provide continued benefits for many years. These assets include buildings, production equipment or furnishings. Companies capitalize these assets and depreciate them over several years. The company records depreciation every year using the accumulated depreciation account.
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Purpose
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The company records the original asset value at the time of purchase. This value includes the purchase price, any installation charges incurred and shipping charges. This value remains in the asset account as long as the company owns the asset in order to maintain the historical cost in the accounting records. The depreciation recorded does not impact the asset account. Instead the company records the depreciation in accumulated depreciation. The balance in accumulated depreciation maintains the total amount depreciated since the acquisition of the asset. The company calculates the net book value of the asset by subtracting the accumulated depreciation balance from the asset balance.
Account Classification
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The company classifies accumulated depreciation as a contra asset account. The company reports accumulated depreciation with all the other assets of the company. However, accumulated depreciation behaves differently than other assets, which makes it a contra account. Accumulated depreciation reduces the total assets rather than adding to the total assets.
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Increase In Accumulated Depreciation
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Accumulated depreciation increases every time the company records depreciation expense. Each period, the company determines the amount of depreciation incurred on the fixed assets and records a journal entry for that amount. The journal entry increases depreciation expense and increases accumulated depreciation. Occasionally, a company recognizes that previous depreciation estimates were inaccurate and that it needs to record a higher amount of accumulated depreciation to correct the accounting records. The journal entry to correct the accounting records increases depreciation expense and increases accumulated depreciation.
Decrease In Accumulated Depreciation
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Accumulated depreciation decreases when the company sells the asset or donates the asset. The company records a journal entry to remove the asset and the accumulated depreciation from the accounting records.
The journal entry to record the sale of an asset recognizes an increase in cash for the payment, a decrease in the fixed asset account, a decrease in accumulated depreciation and includes a gain or loss on the sale. The journal entry to record the donation of an asset recognizes an increase in charitable contributions for the book value of the asset, a decrease in the fixed asset account and a decrease in accumulated depreciation.
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