What is accumulated depreciation?

Accumulated depreciation is the total amount of a plant asset's cost that has been allocated to depreciation expense since the asset was put into service. Accumulated depreciation is associated with constructed assets such as buildings, machinery, office equipment, furniture, fixtures, vehicles, etc.

The amount of accumulated depreciation is used to determine a plant asset's book value (or carrying value). For example, a delivery truck having a cost of $50,000 and accumulated depreciation of $31,000 will have a book value of $19,000. (It is important to note that an asset's book value does not indicate the asset's market value since depreciation is merely an allocation technique.)

The accumulated depreciation of each plant asset cannot exceed the asset's cost. If an asset remains in use after its cost has been fully depreciated, the asset's cost and its accumulated depreciation will remain in the general ledger accounts and the depreciation expense stops. When the asset is disposed (sold, retired, etc.) the asset's cost and accumulated depreciation are removed from the accounts.

What is a Scrap Value?

In financial accounting, scrap value is associated with the depreciation of assets used in a business. In this situation, scrap value is defined as the expected or estimated value of the asset at the end of its useful life. Scrap value is also referred to as an asset's salvage value or residual value. The following example illustrates how the scrap value is used.

A business acquires equipment at a cost of $150,000 and estimates that its scrap value will be $10,000 at the end of its useful life of 7 years. The annual straight-line depreciation expense will be $20,000 [($150,000 cost minus $10,000 scrap value) divided by 7 years]. 

Fixed asset retirement details

Asset retirement with a loss - Retirement occurs when a depreciable asset is taken out of service and no salvage value is received for the asset. In addition to removing the asset's cost and accumulated depreciation from the books, the asset's net book value, if it has any, is written off as a loss. Suppose the $90,000 truck reaches the end of its useful life with a net book value of $10,000, but the truck is in such poor condition that a salvage yard simply agrees to haul it away for free. The entry to record the truck's retirement debits accumulated depreciation-vehicles for $80,000, debits loss on retirement of vehicles for $10,000, and credits vehicles for $90,000. The loss is considered an expense and decreases net income.

Journal entry

	Debit	Credit
Accumulated Depreciation	80000
Loss on retirement of asset	10000
Asset account		90000

A gain never occurs when an asset is retired. If the entire cost of an asset has been depreciated before it is retired, however, there is no loss. For example, if the company using the truck had expected no salvage value and, therefore, had allocated $90,000 in depreciation expense to the truck before its retirement, the disposition would be recorded simply by debiting accumulated depreciation-vehicles for $90,000 and crediting vehicles for $90,000.

Journal entry

	Debit	Credit
Accumulated Depreciation	90000
Asset account		90000

Sale of depreciable assets. If an asset is sold for cash, the amount of cash received is compared to the asset's net book value to determine whether a gain or loss has occurred. Suppose the truck sells for $7,000 when its net book value is $10,000, resulting in a loss of $3,000. The sale is recorded by debiting accumulated depreciation-vehicles for $80,000, debiting cash for $7,000, debiting loss on sale of vehicles for $3,000, and crediting vehicles for $90,000.               

Journal entry

	Debit	Credit
Accumulated Depreciation	80000
Cash account	7000
Loss on sale of asset	3000
asset account		90000

       

If the truck sells for $15,000 when its net book value is $10,000, a gain of $5,000 occurs. The sale is recorded by debiting accumulated depreciation-vehicles for $80,000, debiting cash for $15,000, crediting vehicles for $90,000, and crediting gain on sale of vehicles for $5,000.

Journal entry

	Debit	Credit	Type of account	Rules
Accumulated Depreciation	80000		Nominal account	All expenses and losses
Cash account	15000		Real account	what comes in
Asset account		90000	Real account	what goes out
Gain or loss accoun		5000	nominal account	all incomes and gains