Depreciation refers to the decline in an asset's value as it is used up in the business's operations. In each of the time periods that constitute the asset's useful lifespan, a portion of its value is deducted as depreciation expense to represent this loss, and those losses are amassed as that asset's accumulated depreciation. Accumulated depreciation represents the total portion of the asset's value that has been lost due to its usage. It is a contra-asset, meaning that it has a credit balance.
Debit and Credit
Debit and credit refers to the left and right sides of the accounting ledger, respectively. Each transaction is recorded on both sides of the ledger such that each side equals the other. For example, if the business sells its product and thus produces revenue, it records a debit to cash and a credit to revenue. Debits and credits do not indicate whether the account has a positive or a negative balance -- that depends entirely on what kind of account it is.
Debits and Credits in Relation to Assets
Assets are defined as being the economic resources businesses use to produce their revenues. Certain assets -- those that are long-term, tangible, and possessing finite usefulness -- are depreciated due to their regular patterns of value loss, and, therefore, those assets possess accumulated depreciation. Assets possess a natural debit balance, meaning they are positive when they possess a debit balance and negative when they possess a credit balance. In most cases, assets cannot possess a negative balance because there can't be less of a resource than zero.
Certain accounts exist specifically to offset their parent accounts and possess balances that are the opposite of their parent accounts. For example, contra-liabilities possess debit balances when liabilities normally possess credit balances and are deducted from those parent accounts to calculate their net balances. Contra-assets are accounts that offset assets and possess credit balances. With respect to assets, contra-assets can be said to possess negative values.
Accumulated depreciation is a contra-asset and, therefore, possesses a credit balance. It represents the total value its parent asset has lost through its usage, and it builds up over time as depreciation expense is charged again and again on its parent asset. It is normal for accumulated depreciation to possess this negative value, which simply indicates that the parent asset has been used long enough to start incurring depreciation expense and has started to lose its value through its usage. The book value of the parent asset as recorded on the accounts minus its accumulated depreciation is equal to its remaining value.
Alan Li started writing in 2008 and has seen his work published in newsletters written for the Cecil Street Community Centre in Toronto. He is a graduate of the finance program at the University of Toronto with a Bachelor of Commerce and has additional accreditation from the Canadian Securities Institute.