Analysis of Accumulated Consumption in the Budget

Why It Matters

Accumulated depreciation in the budget plays an important role in showing the actual current value of the assets owned by the company. It represents the reduction of the original value of acquired assets as they lose value over time due to wear and tear, obsolescence, or any other factor.

Adding Assets to the Balance Sheet

Imagine you own a restaurant. You decided to expand your catering department, so you purchased a delivery truck worth $50,000 to handle larger and newer orders. You will need to use one of the accepted depreciation methods: straight-line depreciation, sum-of-the-years-digits depreciation, accelerated depreciation, or double-declining balance depreciation.

Recording Accumulated Depreciation

Once you own the truck and show it as an asset on the balance sheet, you will need to record the loss in the vehicle’s value each year. Assume that the truck will have a salvage value of $5,000 at the end of 10 years. As a result, depreciation expense of $4,500 appears on the income statement annually.

Maintaining Accurate Depreciation Records

The depreciation policies for companies with capital-intensive assets, such as airlines, are extremely important. A strong management team can use generous depreciation assumptions regarding asset life expectancy or salvage value, resulting in inflated depreciation expenses on the income statement, thus inflating profits and unrealistically reducing accumulated depreciation on the balance sheet.

Net Accumulated Depreciation

When looking at the balance sheet, you may not see individual assets, but you will see aggregated assets – a collection of all office equipment, computers, furniture, fixtures, airplanes, trucks, railcars, buildings, land, and more. Many companies do not even bother to show the accumulated depreciation account at all. Instead, they show a single line called “Property, Plant, and Equipment – Net.” This addition “Net” indicates the fact that the company has deducted accumulated depreciation from the purchase price of the assets and is showing you only the final result.

Source: https://www.thebalancemoney.com/accumulated-depreciation-on-the-balance-sheet-357562