# What Is Accumulated Depreciation

273

What is accumulated depreciation? Your balance sheet is a statement of your business’s financial condition that includes what is owed to the business by its customers and what has been purchased by the business from its customers or other third parties. The total amount realized by the business from all purchases and sales is called the gross profit. When a business deducts its expenses, it is possible to calculate what is accumulated depreciation.

What is accumulated depreciation? When you deduct your expenses from your gross profit and then apply them to the gross value of the fixed assets of your business, you are calculating what is accumulated depreciation. Depreciation is the difference between the actual purchase cost less the depreciated value.

How are expenses related to assets? Depreciation is based on the type of asset – a fixed asset or a variable-income asset. A fixed asset is something that will last for a period of time – like a plant or a building. Fixed assets do not change in value. A variable-income asset, on the other hand, can increase or decrease over time as a result of changes in the interest rates or the market value of commodities. Your balance sheet will record what is outstanding as a depreciating asset and what is outstanding as an increasing asset.

You can depreciate an asset for tax purposes by reducing its book value. To do this, subtract the depreciated value from the book value of the asset. To determine the amount of your deduction, multiply your net book value by your tax rate and the depreciation factor. Generally, the more you invest in a business, the more you will reduce your taxable income. In addition, the longer you run the business, the more you will accrue capital.

A contra asset account is the opposite of an accrual account. The contra asset account represents the difference between what is owed to the business and what the company is worth at the end of a period of sales and expenses. Your tax calculation will be affected by this difference. For example, if your sales volume declines by 20%, but the cost of goods sold perishable by the end of the period is only \$1.00 more than your inventory cost perishable, then your tax bill will be less than it would be under the fair market value principles.

Another way to reduce your tax bill while maintaining a positive cash flow is to divide your total cost of goods sold by the amount of the inventory that is available to you – your long-term asset. Your tax calculation will be affected by your ratio of long-term assets to the total cost of goods sold. Your ratio is determined by comparing the total assets/total cost of goods sold. If your ratio is greater than zero, you will have accumulated depreciation and if it is less than zero, you will have retained useable property.