Accumulated Depreciation – Buildings is a contra asset account that holds the total depreciation recorded on a company's buildings since they were acquired. It carries a credit balance and is reported directly beneath, or netted against, the Buildings account in the property, plant and equipment section of the balance sheet. Cost minus this balance is the buildings' book value.
The account is a building-specific version of accumulated depreciation. Most companies keep a separate accumulated depreciation account for each major class of fixed asset, so that the balance sheet notes can show the cost and depreciation of buildings separately from equipment, land improvements and other classes. Land itself is never depreciated, so it has no accumulated depreciation account.
Accumulated Depreciation – Buildings in plain terms
Picture the price tag of a building as a full bar that slowly empties as the building gets older. Accountants do not erase the original price; they keep it in the Buildings account. Instead, they keep a second running total of how much of the bar has been used up so far. That second total is accumulated depreciation.
Reading the two together tells you both what the building cost and how much of that cost has already been charged against profits over the years. The difference is what remains to be charged in future years, which is not the same thing as what the building would sell for today.
How the account works
As a contra account, Accumulated Depreciation – Buildings has the opposite normal balance to the asset it offsets. Each period's depreciation is recorded with a debit to Depreciation Expense – Buildings and a credit to Accumulated Depreciation – Buildings. The Buildings account itself stays at historical cost, in line with the historical cost principle, which preserves the original price for disclosure and for later disposal calculations.
Because the account is a permanent account, its balance is not closed at year end. It grows every year until the building is fully depreciated, sold or demolished.
Worked example
A company buys an office building for $1,200,000, of which $200,000 is allocated to the land. The $1,000,000 building portion has an estimated useful life of 40 years and a salvage value of $40,000. Using the straight-line method, annual depreciation is ($1,000,000 − $40,000) ÷ 40 = $24,000.
Each year the company debits Depreciation Expense $24,000 and credits Accumulated Depreciation – Buildings $24,000. After 10 years the account shows a credit balance of $240,000, and the balance sheet presents:
| Line | Amount |
|---|---|
| Buildings, at cost | $1,000,000 |
| Less: accumulated depreciation – buildings | (240,000) |
| Buildings, net | $760,000 |
Disposal, impairment and tax
When a building is sold or demolished, its cost and its accumulated depreciation are both removed. In the example, if the building were sold after 10 years for $800,000, the company would debit Cash $800,000 and Accumulated Depreciation – Buildings $240,000, credit Buildings $1,000,000 and credit a gain on sale of $40,000. The general procedure is described in disposal of fixed assets.
If a building's carrying amount is not recoverable, an impairment loss may be recognized, and many companies then reset the cost basis and accumulated depreciation to reflect the written-down amount. For federal income tax, buildings are depreciated under MACRS, generally over 27.5 years for residential rental property and 39 years for nonresidential real property, so the tax balance often differs from the book balance and gives rise to deferred taxes. Significant improvements to a building are added to its cost and depreciated over their own remaining life, while routine repairs are expensed.
Reading the balance in analysis
The ratio of accumulated depreciation to cost gives a rough sense of how far through its life a property portfolio is. In the example, $240,000 of $1,000,000 means the building is about a quarter depreciated. Dividing accumulated depreciation by the annual charge, $240,000 ÷ $24,000, gives an estimated average age of 10 years. Analysts use such measures to anticipate future capital spending, because an old building may need major renovation soon. They also remember that the net figure is a book value based on cost and estimates, so a building carried at $760,000 may be worth far more or less on the market, especially after many years of rising property prices.