Depreciation is a very common phenomenon in an organization. It is because over the time it is normal for a company to lose the value of its assets. This is known as depreciation. It is also a commonly observed fact in the case of organization that the declination of the price of the asset is usually recorded as an expense. This expense is then entered in a balance sheet. The monthly depreciation of the accumulated assets is greatly dependent on the validity of the asset’s lifespan. It is interesting here to note that the usual lifespan of an asset ranges from three to 20 years for personal property. On the other hand, if the asset is of land improvements, then the lifespan would be of 15-20 years. Interestingly, the asset’s lifespan for a residential real estate is up to 30 years on an average.
What is Accumulated Depreciation?
Accumulated depreciation is also known as the total amount of the asset cost of a particular organization which has been billed to the expense of depreciation since the last time the asset was in service. It is important here to note that accumulated depreciation is usually associated with various constructed assets. These constructed assets comprises of machinery, buildings, fixtures, vehicles and various types of office equipment. Moreover, it is also known by the name of contra asset account. When the expense related to depreciation is debited in each accounting period, the accumulated depreciation gets credited.
In this context, it is interesting to note that if you subtract the accumulated depreciation from the cost results of an asset, you would get the book price of the asset. The book price of the asset is also known as the carrying value. This is the reason that the balance of credit in the accumulated depreciation hardly exceeds the balance of debit in the account of assets. Accumulated depreciation comes to the fore when the price of the assets is capitalized. Capitalized assets usually provide value for more than one year.
How to Calculate Monthly Accumulated Depreciation?
It is vital to note here that the IRS provides a lengthy guide about the context of depreciation. The current depreciation system that is used by the IRS is also known as the Modified Accelerated Cost Recovery System. It is abbreviated as MACRS. This method allows the value of depreciation to be calculated by the usage of either a straight line method or a declining balance method. Here is the list of two methods with the help of which accumulated monthly depreciation can be calculated.
Straight Line Method:
With the help of this method, you can select how much amount of asset you can depreciate. Here is the list of steps with the help of which one can calculate the monthly straight-line depreciation. In the first step, you have to ensure that you are subtracting the average price of the asset from the cost, so that you can assess the depreciated amount. In the next step, you have to divide the amount derived from subtraction by the number of years that are left in the lifespan of the asset. In the final step, divide this by 12 so that you can get the monthly depreciation.
The Declining Balance Method:
It is that kind of a method which is widely used to identify the majority of the asset’s depreciation in its earlier stage of lifespan. There are usually two variations of this method that can be used to calculate the accumulated depreciation. One is the 150% declining balance method and the other is the double-declining balance method. It is a more complex method than the earlier one. However, it comes handy in various cases as the value of the accumulated depreciation alters from time to time.
Examples of Accumulated Depreciation:
Here is an interesting example of the accumulated depreciation that can be cited in this context.
Let’s say that a company whose name is ABC bought equipment by investing 100,000 dollars around three years ago. Let’s say that the value of the equipment depreciates by 10,000 dollars a year. Hence, it is easy to calculate the depreciation value in the case of the particular equipment. In the first step, you should calculate the accumulated depreciation by adding 10,000 dollars three times. Hence, we obtain a result of 30,000 dollars.
In the next step, it is important for the company to calculate the net book value. The net book value is usually calculated by subtracting the accumulated depreciation (30,000 dollars) from the purchase price. Hence, our result is 70,000 dollars.
What is the difference between depreciation expense and accumulated depreciation?
The expense of depreciation is also known as a periodic depreciation charge which a business uses against its assets in the reporting period at regular intervals. On the other hand, accumulated depreciation is known as the cumulative amount of the depreciation which has gathered since the depreciation of each asset has been initiated. It is also important to note that depreciation costs usually appear on the statement for income. Whereas, it is vital to mention the depreciation of accumulated costs usually appear on the balance sheet. Moreover, the depreciation expense for an asset is usually halted when the asset is sold. On the other side, the depreciation of build up costs is usually reversed when the price of the asset is solid.
It is important for everyone to know that the accumulated depreciation is one of the key components of the balance sheet. It is also a key component of the net book value. The net book value is the value through which the company carries an asset on the balance sheet in their accounts. In case the accumulated depreciation of a company is quite high, Its net book value may fall below the actual market value of that organization. This implies that the organization can be overvalued. It is also a great way in which the company’s liability can be guessed.