# Accumulated Depreciation

## What it is:

Accumulated depreciation is the sum total of the depreciation recorded for certain assets.

## How it works (Example):

Let's assume Company XYZ bought a MegaWidget for \$100,000 three years ago. The MegaWidget depreciates by \$10,000 a year. Thus, the accumulated depreciation recorded for the MegaWidget is:

Accumulated depreciation = \$10,000 (year 1 depreciation) + \$10,000 (year 2 depreciation) + \$10,000 (year 3 depreciation) = \$30,000.

Company XYZ will then record the net book value of the MegaWidget like this:

Net book value = \$100,000 purchase price - \$30,000 accumulated depreciation = \$70,000

## Why it Matters:

Accumulated depreciation is a key component of the balance sheet and it is a key component of net book value. Net book value is the value at which a company carries an asset on its balance sheet. It is equal to the cost of the asset minus accumulated depreciation.

When a company's accumulated depreciation is high, its net book value may be below the actual market value of the company, meaning the company might be overvalued. Likewise, if the company's accumulated depreciation is low, its net book value may be above the actual market value, and the company might be undervalued.

The disparity highlights one very important aspect of accumulated depreciation: it does not reflect true losses in the market value of an asset (or company).

Related Terms View All
• Though most of the trading is done via computer, auction markets can also be operated via...
• Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
• Savings bonds are bonds issued by the U.S. government at face values ranging from \$50 to...
• The basic idea behind break-even point is to calculate the point at which revenues begin...
• If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...