Accumulated depreciation does appear on the balance sheet, because it is a valuable financial measure for a company to consider. The balance sheet is a document that displays the details of a company's financial resources and obligations at any point in time. Because accumulated depreciation is a contra asset, it appears on a traditional balance sheet. Some considerations when determining the value of an asset include depreciation, purchase price, book value and market value.
A balance sheet is a snapshot of a company's financial standing at any given time. The balance sheet is split into three categories--assets, liabilities and ownership (or owner's) equity. Assets are items (whether tangible or intangible) that hold a positive value for a company, and they are usually found on the right side of a balance sheet. Examples include cash, copyrights and office buildings. Liabilities signify an obligation to pay for something. Examples include accounts payable, wages, bonds and promissory notes. Owner's equity is any value (negative or positive) left in the business after a company matches up all assets and liabilities. Both liabilities and owner's equity most often are located on the left side of the balance sheet. If there are more assets than liabilities, then owner's equity has a positive value, and the inverse is also true if there are more liabilities than assets. At all times, the following balance sheet formula must be true: assets equals liabilities plus ownership equity.
Depreciation is a method for businesses to account for lost value in an item over its life. For example, a chair may last for five years, so the company depreciates the chair over five years by reducing the chair's book value by one-fifth per year. After that, the chair is, in theory, worth nothing to the company, because its value is now zero. However, as you will see in the next section, in practice, depreciation works somewhat differently.
Accumulated depreciation is an account that lists the total depreciation values for all items being depreciated on the balance sheet. To find the net book value of an item that is not used for revenue generation, subtract the item's negative depreciation balance from its positive asset balance. Some balance sheets will have a category for the net book value for items being depreciated.
The book value of an asset is how much it is currently worth after subtracting accumulated depreciation from the purchase price. Other factors that should be considered in an asset's book value are whether or not the asset is generating any interest or revenue, because that can increase the book value.
The market value of the asset being depreciated is simply the price of the item on the open market. It could be higher than the purchase price if it appreciates after the initial purchase or lower than the purchase price if it depreciates after the initial purchase. The market value must be considered when determining an asset's book value.
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