Why accumulated depreciation matters to a first-time founder
Accumulated depreciation shows how much of an asset’s cost has been recorded as depreciation since it became ready to use. Subtracting it from the recorded cost gives the carrying amount, the asset’s net value in the accounts. Founders need this distinction when reading the balance sheet, planning replacements and checking asset records.
Examples of accumulated depreciation
A machine costs S$100,000 and the company records S$20,000 of depreciation each year. After three years, accumulated depreciation is S$60,000 and the carrying amount is S$40,000 before any further reduction for lost value. The records still show the original S$100,000 cost.
Common misunderstanding
Accumulated depreciation is not cash saved to replace the asset, and it does not show the asset’s market value. It is the total cost allocated to past accounting periods. The asset could sell for more or less than its carrying amount, and it may still work after being fully depreciated.
When to use it
Use it when reviewing asset records, balance sheets, asset sales and depreciation estimates. Check that the opening balance, this period’s depreciation and removed assets match the accounting records. If an asset’s use, expected sale value or condition changes significantly, ask an accountant whether to update estimates or test for a further loss in value.