Accumulated Depreciation Explained Bench Accounting

Accumulated Depreciation and Book Value

The $8,000 worth of depreciation could be used by the company for a tax deduction. Additionally, keeping close track of accumulated depreciation can help the company budget for future replacement costs and make sound financial decisions about when to upgrade equipment. Generally Accepted Accounting Policies (GAAP) require that depreciation expenses be charged to all fixed assets based on the estimated economic life of each. Accumulated depreciation is incorporated into the calculation of an asset’s net book value.

Tracking the depreciation expense of an asset is important for reporting purposes because it spreads the cost of the asset over the time it’s in use. Under the straight-line method, depreciation would be $2,500 a year – the $25,000 cost divided by 10 years. So under the 200% declining balance method, depreciation in year 1 would be 200% of that, or $5,000.

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