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Why does accumulated depreciation have a credit balance on the balance sheet?

Modified on: 2018/07/16
A:

Accumulated depreciation is increased with a credit entry, although it is shown on the asset side of the balance sheet. Following the accounting equation, which is the basis for a balance sheet, assets must always be equal to liabilities plus equity.

Assets, on the left side of the equation, are increased with debits and decreased with credits. Liabilities and equity accounts are increased with credits and decreased with debits. However, accumulated depreciation is a special account on the asset side of the balance sheet, which is increased with a credit and decreased with a debit. This is because the accumulated depreciation account is essentially a substitute for decreasing the cost of assets as they lose value over time. In other words, instead of crediting the equipment account directly for depreciation, the depreciable assets account is maintained at the asset's original cost, and depreciation to the asset is recorded by increasing credit balance of the accumulated depreciation account.

Accumulated depreciation is maintained in a separate account rather than being recorded to the asset account directly. This separates changes in the asset value due to depreciation from changes in the asset account value, which in turn are due to actually disposing assets. For example, if a company had $1 million of fully depreciated machinery, the net asset value would be $0. Rather than show on the balance sheet that the company had $0 of machinery on hand, use of the accumulated depreciation account allows the financial statement to show that the company has a significant amount of machinery on hand, and that the machinery is fully depreciated.

This is informative to financial statement users, because they will now understand that this is a business that might be dependent on this equipment, and they can also guess that this equipment might be reaching the end of its useful life. This is much more informative than simply showing no equipment on the balance sheet once it is fully depreciated.


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