Accumulated depreciation is a contra-asset accounting entry that represents the cumulative depreciation expense recognized on a fixed asset.
It is important to understand where accumulated depreciation goes because it can impact the financial statements and the company's tax liability.
In general, accumulated depreciation is recorded on the balance sheet as a reduction to the related fixed asset account. For example, if a company purchases a building for $100,000 and depreciates it over 10 years, the accumulated depreciation account will increase by $10,000 each year. At the end of 10 years, the accumulated depreciation account will be $100,000 and the net book value of the building will be $0.
Key Points | Description |
---|---|
Definition | Accumulated depreciation is a contra-asset accounting entry that represents the cumulative depreciation expense recognized on a fixed asset. |
Purpose | Accumulated depreciation is used to reduce the carrying value of a fixed asset over its useful life. |
Calculation | Accumulated depreciation is calculated by multiplying the depreciation rate by the cost of the fixed asset. |
Impact on Financial Statements | Accumulated depreciation is reported on the balance sheet as a reduction to the related fixed asset account. |
Tax Implications | Accumulated depreciation can impact a company's tax liability. |
Account | Description |
---|---|
Balance Sheet | Accumulated depreciation is reported on the balance sheet as a reduction to the related fixed asset account. |
Income Statement | Depreciation expense is reported on the income statement as an expense. |
Cash Flow Statement | Depreciation expense is not reported on the cash flow statement. |
Company A: Company A was able to reduce its tax liability by $100,000 by properly accounting for accumulated depreciation.
Company B: Company B was able to improve its financial performance by using accumulated depreciation to reduce the carrying value of its fixed assets.
Company C: Company C was able to avoid a costly mistake by understanding where accumulated depreciation goes.
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