Accumulated depreciation is a compilation of the depreciation associated with an asset. When you sell or otherwise dispose of the asset, you should remove the accumulated depreciation at the same time. Otherwise, an unusually large amount of accumulated depreciation will build up on the balance sheet over time.
For example, Haversack Company has $1,000,000 of fixed assets, for which it has charged $380,000 of accumulated depreciation. This results in the following presentation on Haversack's balance sheet:
|Less: Accumulated depreciation||(380,000)|
|Net fixed assets||$620,000|
Haversack then sells a machine for $80,000 that had an original cost of $140,000, and for which it had already recorded accumulated depreciation of $50,000. It records the sale with this journal entry:
|Loss on asset sale||10,000|
As a result of this entry, Haversack's balance sheet presentation of fixed assets has changed, so that fixed assets before accumulated deprecation has declined to $860,000, and accumulated depreciation has declined to $330,000. The new presentation follows:
|Less: Accumulated depreciation||(330,000)|
|Net fixed assets||$530,000|
In this example, the amount of net fixed assets declines by $90,000 as a result of the asset sale, which is the sum of the $80,000 cash proceeds and the $10,000 loss resulting from the asset sale.