Fixed Asset Accounting
Fixed Asset Controls
How to Audit Fixed Assets
Accumulated depreciation has a credit balance, because it aggregates the amount of depreciation expense charged against a fixed asset. This account is paired with the fixed assets line item on the balance sheet, so that the combined total of the two accounts reveals the remaining book value of the fixed assets. Over time, the amount of accumulated depreciation will increase as more depreciation is charged against the fixed assets, resulting in an even lower remaining book value.
Presentation of Accumulated Depreciation
Since fixed assets have a debit balance on the balance sheet, accumulated depreciation must have a credit balance, in order to properly offset the fixed assets. Thus, accumulated depreciation appears as a negative figure within the long-term assets section of the balance sheet, immediately below the fixed assets line item.
Accumulated depreciation is used instead of a direct reduction of the fixed assets account, so that readers of the financial statements can see that there are fixed assets on the books, and the original amount of this investment. Otherwise, only presenting a net book value figure might mislead readers into believing that a business has never invested substantial amounts in fixed assets.
Accounting for Accumulated Depreciation
Accumulated depreciation is initially recorded as a credit balance when depreciation expense is recorded. Depreciation expense is a debit entry (since it is an expense), and the offset is a credit to the accumulated depreciation account (which is a contra account).