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) + $10,000 (year 2 ) + $10,000 (year 3 ) = $30,000.
Company XYZ net book value of the MegaWidget like this:then record the
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 . is the value at which a company carries an asset on its . It is equal to the cost of the asset minus accumulated depreciation.
When a company's accumulated depreciation is high, its market value of the company, meaning the company might be . Likewise, if the company's accumulated depreciation is low, its may be above the actual market value, and the company might be undervalued.may be below the actual
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).