Accumulated Depreciation

Each year, depreciation is recorded as an expense on the income statement. On the balance sheet, rather than reducing the asset's recorded cost directly, these charges are added up in a separate account called accumulated depreciation.

The asset's net book value is its original cost minus accumulated depreciation. Suppose a delivery van cost 40,000 and is depreciated at 8,000 a year. After three years, accumulated depreciation is 24,000, and the van's net book value is 16,000.

Keeping cost and accumulated depreciation separate shows readers both what the business originally paid and how much of that value has been used up. A company whose accumulated depreciation is very high relative to cost has old assets that may need replacing soon.

Net book value is an accounting figure, not a market price. The van might actually sell for more or less than 16,000. When an asset is sold or scrapped, both its cost and its accumulated depreciation are removed from the books, and any difference between the sale price and book value is recorded as a gain or loss.