Accumulated Depreciation An Asset Or Liability

Is Accumulated Depreciation an asset or a liability?

Explanation

DepreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more is normal wear and tear in the asset’s value as the asset value gets depreciated with the usage and passage of time. Accumulated depreciation is total wear and tear in the value of assets to date. Accumulated depreciationAccumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset’s purchase price and its carrying value on the balance sheet.read more is to be reduced from the asset’s book value to represent the true value of the asset. Accumulated depreciation is the long-term contra assetContra AssetA contra asset account is an asset account with a credit balance related to one of the assets with a debit balance. When we add the balances of these two assets, we will get the net book value or carrying value of the assets having a debit balance.read more as with the usage of assets, the depreciation is applied, and usage of assets contributed to the progress of entity and producing the economic value. But some view depreciation as a liability because it contains the credit balanceCredit BalanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account. Usually, Liability accounts, Revenue accounts, Equity Accounts, Contra-Expense & Contra-Asset accounts tend to have the credit balance. read more, and depreciation is applied even when the asset is not used due to the passage of time and the introduction of new technology, the value gets depreciated. Hence the value of accumulated depreciation does not represent something that produced economic value, whether in the past or the future. Hence it is not an asset nor a liability.

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Example

A Ltd has several long-term assets. The classification of long-term assets and depreciation details are given below:

The business started operations on 01-04-2015. Land purchased on 01-07-2015. Office premises were on rent at the time of the start of business. It was purchased on 01-04-2016. Plant, machinery, and furniture were purchased when incorporating a business, i.e., 01-04-2015. Vehicles were purchased on 01-04-2017 for business operations like pick and drop facilities for managers and other staff members.

Show the classification of the asset as per generally accepted accounting principlesGenerally Accepted Accounting PrinciplesGAAP (Generally Accepted Accounting Principles) are standardized guidelines for accounting and financial reporting.read more and also state at what value the assets will be shown in the balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more and treatment of depreciation and the accumulated depreciation, whether it is treated as an asset or liability. State the values as of 31-03-2020.

Solution:

As the value of land is appreciating; hence land is not a depreciable asset.

Calculation of Net Book ValueNet Book ValueNet book value refers to the carrying value of the corporate assets acquired after accounting for depreciation, as reported in the company’s balance sheet. An asset’s net book value is calculated as “Net Book Value = Original Purchase Cost – Accumulated Depreciation”.read more of Office Building:

Calculation of Net book value of Plant and Machinery:

Calculation of Net book value of Furniture & Fixtures

Calculation of Net book value of Vehicles

Presentation of Asset in Balance Sheet

Accumulated depreciation is neither shown as an asset nor as a liability. Instead, it is separately deducted from the asset’s value, and it is treated as a contra asset as it offsets the balance of the asset. Every year depreciation is treated as an expense and debited to the profit and loss accountProfit And Loss AccountThe Profit & Loss account, also known as the Income statement, is a financial statement that summarizes an organization’s revenue and costs incurred during the financial period and is indicative of the company’s financial performance by showing whether the company made a profit or incurred losses during that period.read more.

Reason

Accumulated Depreciation is neither an asset nor a liability because of the following reasons:

Accumulated depreciation is not considered an asset because assets represent something that will produce economic value to the enterprise over the past. And accumulated depreciation does not produce the organization’s economic value as accumulated depreciation itself shows the credit balance.
Accumulated depreciation is not considered a liability because liability represents the obligation to pay, and accumulated depreciation is not a payment obligation to the entity. Instead, it is created for internal and valuation purposes.Suppose we have to select the classification of accumulated depreciation as an asset or liability. In that case, we will choose it to represent an asset as if we represent it as a liability. It will create an impression that it is obligated to pay the third party, which is not a fact. Hence accumulated depreciation is treated as a contra asset, which means it contains a negative balance used to offset the asset. Hence it is classified separately from a normal asset or liability account.

Conclusion

Accumulated depreciation is the total amount of wear and tear in the value of assets. It is levied due to the continuous usage of assets or devaluation of assets due to the passage of time or the introduction of new technologies. There are mixed views about the classification of accumulated depreciation as an asset or liability. But the industry experts and experienced professionals concluded that accumulated depreciation is neither an asset nor a liability, as it does not produce economic benefit; hence cannot be treated as an asset, nor it is not an obligation towards a third party; hence it cannot be classified as a liability. Hence accumulated depreciation is treated as a contra asset that offsets the balance of the asset. Accumulated depreciation is also shown separately from assets and liabilities as accumulated depreciation in long-term assets against the reduction from the book value of the assetBook Value Of The AssetBook Value of Assets is the asset’s value in the books of records of a company or an institution at any given instance. Assets Book Value Formula = Total Value of an Asset – Depreciation – Other Expenses Directly Related to it read more.

Is Accumulated Depreciation an asset or a liability?#

Explanation#

Example#

Reason#

Conclusion#

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Is Accumulated Depreciation an asset or a liability?

Explanation

Example

Reason

Conclusion

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