Wonderful Accounting?

Question

Does the balance in Accumulated depreciation – Machinery account represent funds to replace the machinery when it wears out? If not, what does it represent?

Answer 1

No, it represents how much less the machinery is worth when you go to get rid of it.

Answer 2

It represents the devaluation of the equipment through use.  It is a way to slowly expense the machine cost, really.

Lets say you buy a new car for 10,000.  Assume that the car depreciates at (for simplicity) 1,000 per year and has a residual value of 1,500.  That means each year the car is worth 1,000 less that the year before.

When you purchase equipment this way, it is not classified as an expense, so it does not affect the bottom line or net worth, you are simply tranfering money from cash to equipment.  The depreciation is the "trickle" expense.