Accumulated Depreciation: Meaning, Calculation and Examples

Published Monday 22 December 2025

Table of contents

• What is accumulated depreciation?
• Depreciation vs accumulated depreciation
• Is accumulated depreciation an asset or a liability?
• How accumulated depreciation affects your financial statements
• Journal entries for accumulated depreciation
• How to calculate accumulated depreciation
• Example: balance sheet with accumulated depreciation
• Simplify your accounting with Xero
• FAQs on accumulated depreciation

Key takeaways

• Calculate accumulated depreciation using the straight-line method by subtracting salvage value from asset cost, then dividing by useful life to determine annual depreciation expense that accumulates over time.
• Record accumulated depreciation as a contra asset on your balance sheet to show realistic current asset values, while claiming annual depreciation expenses to reduce taxable income and improve cash flow.
• Track your assets' book values regularly by subtracting accumulated depreciation from original cost to make informed decisions about replacements, maintenance budgets, and financing applications.
• Use proper journal entries by debiting depreciation expense and crediting accumulated depreciation each period to maintain accurate financial statements and comply with accounting standards.

What is accumulated depreciation?

Accumulated depreciation is the total amount an asset has depreciated since you bought it. It tracks how much value your asset has lost over time.

This matters because it shows your asset's book value, or what it's actually worth today. The formula is simple: asset cost minus accumulated depreciation equals current book value.

For example:

• Office furniture costing $5000 with $1000 depreciation each year. After 3 years, accumulated depreciation is $3000 and the book value is $2000.
• Machinery costs $25,000, with $2500 depreciation each year. After 6 years it has depreciated by $15,000, leaving a book value today of $10,000.

Why understanding accumulated depreciation matters for small businesses

Understanding accumulated depreciation provides three key benefits:

• Better planning: Track asset values to plan replacements and budget for maintenance
• Tax savings: Reduce taxable income through depreciation expenses, keeping more cash in your business
• Easier financing: Show lenders accurate asset values to improve loan approval chances

Depreciation vs accumulated depreciation

Depreciation and accumulated depreciation work together but serve different purposes:

• Depreciation: The expense you record each period (monthly or yearly) showing how much value an asset lost
• Accumulated depreciation: The running total of all depreciation expenses since you bought the asset

Think of depreciation as the monthly payment and accumulated depreciation as your total payments to date.

Here's more information about depreciation.

Is accumulated depreciation an asset or a liability?

Accumulated depreciation is a contra asset; it's neither an asset nor a liability. A contra asset account works like a negative number that offsets your asset's original cost, showing its realistic current value.

Here's how it works:

• Not a liability: You don't owe money or have an obligation to repay it
• Not an asset: It doesn't add value to your business
• Contra asset: It reduces the value of assets on your balance sheet

While you record the contra asset alongside your other assets, it always has a negative value, showing how accumulated depreciation reduces an asset's value from its original cost. This gives a more realistic estimate of an asset's book value.

How accumulated depreciation affects your financial statements

Accumulated depreciation on the balance sheet

Accumulated depreciation reduces an asset's book value on the balance sheet.

Your balance sheet shows an asset's original purchase price. Accumulated depreciation then reduces this amount to show what the asset is worth today.

Accumulated depreciation on the income statement

You record depreciation as an expense, which reduces your taxable income.

As a non-cash expense, it lowers your profits without affecting cash flow.

Accumulated depreciation on the cash flow statement

Because depreciation doesn't affect cash flow, you add it back to net income on the cash flow statement.

This adjustment reflects that depreciation is an accounting expense, not a cash outflow.

Check with your local tax authority to understand how depreciation works in your region.

Journal entries for accumulated depreciation

To record depreciation in your books, you'll make a journal entry. This entry moves numbers between two accounts: depreciation expense and accumulated depreciation.

Each time you record depreciation, you:

• Debit the Depreciation Expense account. This increases your expenses for the period, which reduces your taxable income.
• Credit the Accumulated Depreciation account. This increases the total depreciation for the asset on your balance sheet.

For example, if your annual depreciation is $180, your journal entry would look like this:

• Depreciation Expense: Debit $180
• Accumulated Depreciation: Credit $180

This simple entry keeps your financial statements accurate and up to date.

How to calculate accumulated depreciation

Calculating accumulated depreciation shows you exactly how much value your assets have lost over time. While the straight line method is the simplest approach for many small businesses, tax authorities also specify other methods, such as applying a diminishing value (DV) rate for certain assets.

The straight line depreciation calculation

The straight line method uses this formula to calculate annual depreciation:

Annual depreciation expense = (Asset cost − Salvage value) ÷ Useful life

This gives you the same depreciation amount each year until the asset is fully depreciated, although it's important to check official guidelines as historic depreciation rates may apply to assets acquired in previous years.

Here's an explanation of the components used in the formula:

• Cost of asset: The original purchase price of the asset
• Salvage value: The estimated amount you'll receive for the asset when it's no longer usable, such as resale or scrap value
• Useful life: The estimated number of years the asset will be functional before it becomes unusable or obsolete

Each component affects your annual depreciation expense differently:

• Shorter useful life: Higher annual depreciation (same total spread over fewer years)
• Higher salvage value: Lower annual depreciation (less total value to depreciate)
• Higher asset cost: Higher annual depreciation (more total value to depreciate)

Example: balance sheet with accumulated depreciation

This example shows how accumulated depreciation changes an asset’s net book value on your balance sheet.

Calculate straight line depreciation

Let's calculate accumulated depreciation using the straight line depreciation method. In this example, our asset cost $1000, has a useful life of 5 years, and a salvage value of $100.

Step 1: Calculate the annual depreciation expense

Using our formula above, our example gives us:

($1000 – $100) ÷ 5 = $180 per year

Step 2: Track accumulated depreciation each year

Create a depreciation schedule to track how accumulated depreciation increases each year by the depreciation expense. In our example:

Year 1 – 1 × $180 = $180 Year 2 – 2 × $180 = $360 Year 3 – 3 × $180 = $540 Year 4 – 4 × $180 = $720 Year 5 – 5 × $180 = $900

Step 3: Calculate the asset's book value at a point in time

Use the formula:

Book value = initial cost – accumulated depreciation

In our example, after 3 years, the asset's book value is:

$1000 – $540 = $460

Simplify your accounting with Xero

Managing depreciation and calculating accumulated depreciation can quickly get complicated as your business grows.

Xero simplifies these tasks by streamlining your accounting processes and helping you manage and track your assets. For instance, you can create detailed depreciation schedules that give you a clear view of fixed asset values and improve the accuracy of your financial reporting. Try Xero for free.

FAQs on accumulated depreciation

Here are some of the most commonly asked questions about accumulated depreciation.

How does accumulated depreciation affect cash flow?

Accumulated depreciation doesn't affect cash flow directly because it's a non-cash expense. No money leaves your business when you record accumulated depreciation.

However, it improves cash flow indirectly by reducing your taxable income. Lower taxable income means lower tax bills, which keeps more cash in your business.

What happens to an asset's accumulated depreciation when you sell it?

An asset's accumulated depreciation is removed from the balance sheet when you sell it.

The asset's book value at the time of disposal (asset cost – accumulated depreciation) is compared with the sale price to determine a net gain or loss.

Do I record accumulated depreciation as a debit or a credit?

Record accumulated depreciation as a credit on your balance sheet.

Here's why: Accumulated depreciation is a contra asset that reduces your asset's value. Since assets normally have debit balances, you credit accumulated depreciation to offset and reduce the asset's book value over time.

Is accumulated depreciation a current liability?

No, accumulated depreciation is not a current liability. It's recorded on the balance sheet as a contra asset: an account type that reduces the value of an asset.

Current liabilities are short-term debts due within 12 months, whereas accumulated depreciation lowers the book value of an asset over time; it isn't an amount owed that you have to repay.

Here's more about current and non-current liabilities.