Accumulated Depreciation Adjusting Entry Examples, Samples, Illustrations, Calculation Help Online

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What is an Accumulated Depreciation?

In accounting, an asset is depreciated to recognize the decline in value over its service life and production activity. There are various methods of calculating depreciation expense such as straight-line method and declining balance method. While depreciation expense refers to the depreciation incurred on the asset in the present year, an asset’s accumulated depreciation represents the total, cumulative depreciation on the asset since it has been placed in service.Accumulated depreciation is a contra-asset account. It means increases to accumulated depreciation are credited, while decreases to the account are debited.

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Accumulated Depreciation Adjusting Entry Examples Explanation

To demonstrate how accumulated depreciation is adjusted due to the expense of depreciation, suppose on January 1 a company purchases machinery of $8,000. The asset is estimated to have a useful life of three years. At the time of purchase, it is assumed that the asset will be sold for $800 at the end of its useful life. On January 1, the accounting entry will be as follows: Debit Machinery 8,000 Credit Cash 8,000.

Using the straight-line method of depreciation, the annual depreciation on the asset will be $2,400, the result of the asset’s total cost of $8,000 less its residual value of $800, divided by three years. The accounting entry will be as follows

Debit Depreciation Expense 2,400 Credit Accumulated Depreciation 2,400. The asset’s net book value at the end of the first year is a result of the asset’s cost of $8,000 less accumulated depreciation of $2,400, or $5,600. At the end of year two, accumulated depreciation on the asset will be $4,800. At the end of the third year, the accumulated depreciation on the asset will be $7,200, and the carrying value of the asset will be $800.

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