Accumulated depreciation represents the total amount of depreciation expenses that have been recorded against a fixed asset over its useful life. It reflects the decrease in the value of a physical asset due to wear and tear, aging, or obsolescence. Accumulated depreciation is a contra-asset account, meaning it offsets the gross value of the asset on the balance sheet to reflect its net book value.
Imagine that a car has been purchased for a business. Each year, the car gets older and becomes less valuable because it is being used. Accumulated depreciation is like a tally of how much value the car has lost since the car was bought. It is a way to show on the books of the business that assets like cars, computers, and machinery are not as much as they used to be because they are getting older or out-of-date.
Accumulated depreciation is a key concept in financial accounting and reporting. It helps businesses track the declining value of their assets over time, which is crucial for preparing accurate financial statements, tax calculations, and investment analyses. It allows companies to spread the cost of an asset over its useful life and provides a more accurate picture of profitability and financial health.
For example, a company buys a piece of machinery for Rs. 1,00,000 and expects it to last for 10 years. The machinery might depreciate by Rs. 10,000 per year. After 5 years, the accumulated depreciation on the machinery would be Rs. 50,000.
Source: A to Z of Economics by Dr. NC Raghavi Chakravarthy