Is Accumulated Depreciation a Liability?

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Is Accumulated Depreciation a Liability?
Is Accumulated Depreciation a Liability? (Jupiterimages/Goodshoot/Getty Images)

Accumulated depreciation is not a liability. Accumulated depreciation is a contra-asset. A contra-asset is an account on the balance sheet of a corporation or entity that offsets the balance of a related and corresponding account. Two common examples are accumulated amortisation that offsets intangible assets, such as goodwill, and accumulated depreciation that offsets fixed assets, such as equipment, machinery or computers.

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Liability Definition

A liability is an obligation due to creditors or suppliers within a specified time frame. For example, accounts payable is a liability owed to suppliers or other creditors for services rendered. Another example is a note payable to a bank or other credit to finance the purchase of building, equipment or other long term debt. Accumulated depreciation, on the other hand, is not an obligation to any other individual or entity.

No Cash Requirement

In business accounting, depreciation is used to account for the reduction of the carrying value of capital assets. For example, if a company purchases a piece of equipment for £13,000 and expects it to have a useful life of five years, it will be depreciated over five years at £2,600 per year assuming straight-line deprecation. This gives the company's shareholders a more accurate picture of the value of the company's assets and allows the company to deduct the cost of owning the depreciable asset over time.

No Other Entity

The accounting of depreciation is solely for the purposes of providing an accurate value of an asset over time. Liabilities typically involve an agreement, written or unwritten, to meet an obligation for services rendered. Regardless of the value of any of the company's assets, the liability is to be paid as agreed.

Book Value

As a company pays down its obligation, the inventory or capital assets financed by those obligations do not lose value as a result of paying the liabilities down. Accumulated depreciation, on the other hand, allows a company to record the gradual decline in book value as the capital asset deteriorates.

No Liability Effect

A balance sheet is composed of assets, liabilities, and equity. As the formula goes, Assets = Liabilities + Equity. Accumulated Depreciation only affects assets and equity. As accumulated depreciation increases, the book value of its corresponding asset decreases as does the equity.

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