Accumulated Depreciation – Equipment is a contra asset account that accumulates all of the depreciation expense recorded on a company's equipment since it was placed in service. It carries a credit balance and is shown as a deduction from the Equipment account, so that the balance sheet reports equipment at cost less accumulated depreciation, its book value.
It is one of several class-specific versions of accumulated depreciation. A company may keep separate accounts for machinery, vehicles, computers, office equipment and delivery equipment, or combine them, depending on how detailed its fixed asset records and disclosures need to be. The related expense account is often titled Depreciation Expense: Equipment.
Accumulated Depreciation – Equipment in plain terms
When a bakery buys a large oven, it expects to use it for years, so it does not count the whole price as a cost in the month of purchase. Instead, it charges a slice of the price each year. Accumulated depreciation is the running total of the slices charged so far.
The oven's original price stays on the books, and the running total sits beside it. Subtracting one from the other shows how much of the oven's cost still has to be charged in future years. It is an accounting measure of cost used up, not an appraisal of what the oven would fetch if sold.
Recording depreciation on equipment
Each period the adjusting entry is a debit to Depreciation Expense – Equipment and a credit to Accumulated Depreciation – Equipment. The Equipment account stays at its original historical cost. Equipment usually has a much shorter useful life than buildings, so its accumulated depreciation grows faster relative to cost, and methods vary more widely. Besides straight-line, companies use the declining-balance method for assets that lose most of their usefulness early, or the units of production method for machines whose wear depends on output.
Worked example
A printing firm buys a press on January 1 for $85,000, including $5,000 of delivery and installation, all of which is capitalized. It expects to use the press for 8 years and sell it for $5,000. Straight-line depreciation is ($85,000 − $5,000) ÷ 8 = $10,000 a year.
- End of year 1: Accumulated Depreciation – Equipment $10,000; book value $75,000.
- End of year 3: Accumulated Depreciation – Equipment $30,000; book value $55,000.
- End of year 8: Accumulated Depreciation – Equipment $80,000; book value $5,000, equal to salvage value.
Once the book value reaches salvage value, no further depreciation is recorded even if the press stays in use. The asset and its accumulated depreciation remain on the books until it is retired.
Disposals and trade-ins
When equipment is sold, scrapped or traded in, its cost and accumulated depreciation are removed together. Suppose the press is sold at the end of year 5, when accumulated depreciation is $50,000 and book value is $35,000, for $30,000 cash. The entry debits Cash $30,000, debits Accumulated Depreciation – Equipment $50,000, debits Loss on Disposal $5,000 and credits Equipment $85,000. Failing to remove fully depreciated assets that have been scrapped is a common error that inflates both cost and accumulated depreciation in the fixed asset register.
Book and tax differences
For federal income tax, most business equipment falls into 5-year or 7-year MACRS classes, and immediate expensing elections may be available, so tax depreciation is usually faster than book depreciation. The resulting difference between the book and tax bases of equipment is a common source of deferred tax liabilities. Equipment is also tested for impairment when events suggest its carrying amount may not be recoverable, and analysts compare accumulated depreciation with cost to judge how old a company's productive assets are.
A simple measure is average age: accumulated depreciation divided by the year's depreciation expense. For the press at the end of year 3, $30,000 ÷ $10,000 gives an average age of 3 years. A company whose equipment is mostly depreciated may be stretching the life of old machines and may face heavy capital spending soon, while one with low accumulated depreciation relative to cost has recently reinvested. Because estimates of useful life and salvage value differ between companies, such comparisons work best within one industry and alongside each company's stated depreciation policy, which is disclosed in the notes to its financial statements.