What defines Accumulated Depreciation?

Accumulated Depreciation is defined as a contra asset account that records the total depreciation expense allocated to a tangible fixed asset over its useful life. When specifying that it has a credit balance, this indicates that it directly reduces the total value of assets reported on the balance sheet.

In essence, even though the underlying asset may have been recorded at its original cost, the accumulated depreciation reflects the wear and tear or usage of that asset, thus reducing its book value over time. By maintaining a credit balance, it effectively serves to decrease the total assets, enabling accurate financial reporting of the asset's remaining value.

This definition is crucial because it highlights the role of accumulated depreciation in the accounting cycle and emphasizes its function in reflecting the asset's current value to stakeholders. Understanding this helps in grasping how depreciation impacts financial statements and informs decisions related to asset management.