accumulated depreciation

Imagine keeping a running tally of how much an asset has been 'used up' so far. Each year you add this year's depreciation to the pile, and the pile only grows. After three years, that pile tells you the total wear-and-tear charged against the asset since the day you bought it. That growing running total is accumulated depreciation — it never resets to zero while you still own the asset.

Accumulated depreciation is a contra-asset account: it sits in the asset section of the balance sheet but carries a credit balance and is subtracted from the asset's cost. It collects the sum of all depreciation expense recorded on an asset (or group of assets) from acquisition to the present. So if a 50,000 machine has been depreciated by 9,000 a year for three years, accumulated depreciation is 27,000, and the balance sheet shows the machine at cost 50,000 less accumulated depreciation 27,000, for a book value of 23,000. Each year's depreciation entry debits depreciation expense and credits accumulated depreciation — it grows the contra account rather than directly shrinking the asset.

Keeping a separate contra-account, instead of just chipping away at the asset's recorded cost, is deliberate: it preserves the original cost in plain view while showing how much has been depreciated, so a reader can judge both how much the company invested and how worn-down the assets are. A high ratio of accumulated depreciation to cost hints at an aging asset base that may soon need replacing. The crucial caveat: accumulated depreciation is not a pile of cash and not a reserve to buy a new asset — it is merely a tally of expense already recognized.