Accumulated Depreciation

Definition of "Accumulated Depreciation"

Sharon Dolezal real estate agent

Written by

Sharon Dolezalelite badge icon

Coldwell Banker

Any real estate owner is aware that assets depreciate over time. So exactly what is accumulated depreciation then? As depreciation happens to every asset, whether it is a three-story mansion or a couch. The accumulated depreciation definition explains how this type of depreciation calculates the asset’s depreciation up to a specific point in its life. Accumulated appreciation works to determine the contra asset account, or in other words, the natural balance that lowers the asset value. It is also referred to as the accrual of depreciation as it uses the accrual method of accounting for expenses and revenues.

How does Accumulated Depreciation work?

Any business that adheres to the generally accepted accounting principles (GAAP) respects the matching principle that demands matching each revenue in the same accounting period with its corresponding expense. The business expense is the capital asset’s value during every year through depreciation, but in that same period, those assets generate revenue while they are used. The expense and the revenue will match up and be added through adjusting journal entries.

Accumulated depreciation summarizes how much an asset depreciated up to a certain point. After each accounting period, the depreciation expense is added to the already existing accumulated depreciation in the books. The asset’s value that depreciated at the end of its useful life is its carrying value. When the asset is no longer useful, that value will match its salvage value, which is the revenue gained from the use of that asset. The carrying value is the asset’s original cost minus its accumulated depreciation.

Example of Accumulated Depreciation

Purchasing a piece of equipment for $11,000 with a useful life expectancy of 10 years and a salvage value of $1,000, the company splits the equipment’s cost for the following 10 years. The company will depreciate at an amount of $1,000 yearly until the value in the books for the asset is at $1,000. After each accounting period is over, the new value of depreciation is added to the one before. Each year the depreciation accumulates, and the accumulated depreciation grows by $1,000 every year for the following 10 years. At the end of the asset’s useful life expectancy, the accumulated depreciation will be $10,000, and its carrying value matches with its salvage value.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Real Estate Terms

The total return from holding a real estate investment for the holding period of time. The computation follows: For a mutual fund investing in a real estate, the return is in the form ...

In appraisal jargon, property currently being appraised. ...

Also called profit and loss statement. A financial statement depicting a business entity's operating performance and reports the components of net income, including sales of real estate, ...

Temporary financing meeting a developer's financial difference between a construction loan and a permanent mortgage. ...

A delay in making a principal payment on a mortgage that a bank allows a debtor for current financial difficulties. The extension of a loan at maturity at the 'going' market interest ...

Danger, hazard, risk, or peril. For example, jeopardizing a piece of property by pledging it as collateral for a loan. ...

Approach to valuing property based on its replacement cost. The cost of each major element of the property per square foot is added together and multiplied by the total space to estimate ...

A public officer given the right to authenticate a document, accept a person's oath, administer depositions, and to conduct other activities in commercial business. An official seal is used ...

List of records kept of what is owned by an individual such as the deed to a house and the title to land. ...

Popular Real Estate Questions