Accumulated depreciation and how it affects the asset's book value: which statement is true?

• A. Accumulated depreciation is the total depreciation recognized to date; Net book value equals cost minus accumulated depreciation.
• B. Net book value equals market value plus accumulated depreciation.
• C. Net book value equals cost minus accumulated depreciation plus residual value.
• D. Accumulated depreciation is a measure of cash reserves set aside for asset replacement.

Answer: (A)

Accumulated depreciation is the running total of depreciation expense recorded against an asset since it was put in use. It is a contra-asset, meaning it reduces the asset’s reported value on the balance sheet. The asset’s net book value is the original cost minus this accumulated depreciation. The salvage or residual value is used to help determine depreciation over time, but it isn’t subtracted again from the cost in the net book value calculation. Market value is a separate concept and not part of the net book value formula, and accumulated depreciation does not represent cash reserves; it’s an accounting measure of wear and tear.

So the true statement is that accumulated depreciation is the total depreciation recognized to date; net book value equals cost minus accumulated depreciation.