Accumulated Depreciation - Definition & Advantages of Accumulated Depreciation

What is Accumulated Depreciation? 

Accumulated depreciation is an accounting method for tracking the declining value of an asset over its lifespan. It evenly spreads out the asset's cost over its useful life. The accumulated depreciation account is a contra-asset account that reduces the asset's value on financial statements. 

Advantages of Accumulated Depreciation 

Accumulated depreciation offers numerous benefits: 

1. Expense and Revenue Matching: This method helps businesses to match their expenses with the revenues the asset generates, improving financial reporting and future expense prediction.

2. Tax Benefits: Businesses can deduct the depreciation expense from their taxable income, reducing their tax liability and enhancing their financial performance.

3. Financial Planning: It offers insight into future expenses linked to the replacement or repair of long-lived assets, aiding in financial and budget planning.

4. Collateral Value: Lenders use accumulated depreciation information to assess a business's assets' value for loan eligibility.

Conclusion 

Accumulated depreciation is a useful accounting tool. It helps in expense and revenue matching, tax reduction, financial planning, and loan assessments. For its use, consulting an accountant or financial advisor is recommended.