What is Accumulated Depreciation?

Accumulated depreciation is a contra-asset account: it carries a credit balance that reduces the cost of fixed assets on the balance sheet. Each period's depreciation expense increases it.

Example

A business buys a delivery van for $40,000 and depreciates it over five years on a straight-line basis for its books, $8,000 per year. After three years, accumulated depreciation is $24,000 and the van's book value is $16,000.

Why keep it separate

Keeping cost and accumulated depreciation in separate accounts preserves the original cost, which matters for insurance, for calculating gains or losses on sale and for tax basis. The IRS explains in Publication 946 how depreciation reduces an asset's basis.

When an asset is sold or scrapped

Both its cost and its accumulated depreciation are removed from the books. The difference between the sale price and book value is a gain or loss. On tax returns, part of the gain may be taxed as depreciation recapture.

Book vs tax accumulated depreciation

Many small businesses depreciate assets faster on their tax returns, using section 179 or bonus depreciation, than on their books. Accumulated depreciation can therefore differ between the books and the tax return balance sheet. Your fixed asset register should track both.

Common errors

• Assets that were sold years ago still carrying accumulated depreciation
• Depreciation recorded in a lump sum at year end instead of monthly, distorting monthly results
• Depreciation continuing after an asset is fully depreciated

See what is depreciation.

Related terms

• Assets: Assets are resources a business owns or controls that are expected to provide future economic benefit.
• Book Value: Book value is the amount at which an asset or a business is carried on the balance sheet.
• Tax Basis: Tax basis is the amount the tax law treats as your investment in property, used to figure depreciation and gain or loss.
• Depreciation Recapture: Depreciation recapture is the portion of gain on the sale of a depreciated asset that is taxed as ordinary income because of earlier depreciation deductions.

Browse more definitions in the small business glossary.