The Difference Between the Equipment Account Balance and the Accumulated Depreciation

what type of account is accumulated depreciation

Corporate executives rely on various strategies and tools to channel their operational rhetoric into competitive strengths. To advance commercially, a company scouts the marketplace for opportunities, studies rivals' moves and uses items as diverse as state-of-the-art production equipment, management worksheets and computer gear. Using these tools requires schooling in equipment accounting, depreciation and reporting.

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Equipment Account Balance

When finance people talk about the equipment account, they're alluding to things like manufacturing machinery, production gear and computer hardware. Anything physical and technology-driven that a business relies on to operate and make money qualifies as equipment. This account is part of a larger item that accountants call the "property, plant and equipment" (PPE) master account. In addition to equipment, the PPE master account incorporates elements such as commercial buildings, residential dwellings and cars. To calculate the equipment account's balance, add up the worth of all items that make up the account.

Accumulated Depreciation

Accumulated depreciation draws on the concept of depreciation, which requires that a company spread the cost of a fixed asset over a number of years -- or useful life, as accountants often call that time frame. Accumulated depreciation is the total cost a business has spread on a tangible resource -- the other name

for a PPE item, fixed asset, physical asset or capital resource. A company gradually reduces the value of -- or depreciates -- a PPE item to acknowledge the fact that passage of time typically produces obsolescence, loss of efficiency and technological degradation.

Connection

The equipment account's balance is distinct from accumulated depreciation, but both concepts connect in a company's bookkeeping and financial reporting practices. For starters, both items are integral to a statement of financial position, also called a balance sheet or report on financial condition. The equipment account interrelates with the accumulated depreciation account because any type of machinery or production gear -- by law -- is subject to depreciation. Another area of conceptual proximity lies in the fact that the equipment account's net book value equals the gross balance -- how much a business paid for it originally -- minus accumulated depreciation.

Bookkeeping

Accounting rules -- such as generally accepted accounting principles and international financial reporting standards -- provide guidance on equipment depreciation, record keeping and reporting. To depreciate equipment, a corporate bookkeeper debits the depreciation expense and credits the accumulated depreciation account. Depreciation expense flows into a statement of profit and loss, the data summary finance people often call an income statement, P&L or report on income.

Source: ehow.com

Category: Forex

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