What is Accumulated Depreciation? Definition | Meaning | Formula | Example

Accumulated Depreciation to Fixed Assets Ratio

Accumulated depreciation to fixed assets ratio is the financial ratio which is used to measure the Fixed Asset’s age, value and remaining useful on the balance sheet.

It can get by comparing the depreciation taken on the assets by its crying cost. Simple we can say that this ratio is used to find that what percentage of assets have been used up.

Definition: What is accumulated depreciation to fixed assets ratio?

Definition of Accumulated Depreciation to Fixed Assets Ratio

Value lost of the fixed asset over time is measured by the accumulated ratio. It tells that the asset is how long be useful. when we compare used assets of the company amount by the total amount of the assets then we get the current amount of the assets and also we find the remaining useful time of the assets.

Fixed assets of the company are building, equipment and the service of the company, Depreciation schedule for different assets is different which is the main factor of calculation of this ratio.

This ratio mostly used by the management and investor to find the life of the fixed assets whether it is useable or not. If the ratio is low then the fixed assets will be useful for many years but if the ratio is low then need to change the fixed assets sooner.

How to calculate accumulated depreciation to fixed assets ratio?

When we divide the total accumulated depreciation by the total fixed assets then we get the accumulated depreciation to fixed assets ratio

Accumulated depreciation to fixed assets ratio=accumulated depreciation/total fixed assets

We cannot add the land in the depreciated value because it can’t be used up but have value. so it is never depreciated. So before adding make sure that land is not added in the fixed assets for depreciation.

Accumulated Depreciation Formula implementation

Now from the example we find accumulated depreciation to fixed assets ratio.

a company wants to purchase machinery for which it applies for the loan. Lender’s credit analyst perform thorough investigation from the balance sheet.

On the balance sheet reported fixed assets to have worth $4,200,000 from which $30,000 of land’s worth, On the balance sheet accumulated depreciation reported, is $700,000

16.78%   = 700,000/(4,200,000 – 30,000)

to find the result first we separate land worth from total fixed assets and then put values in formula from which we get the result that is 16.78% which means that company fixed assets are of 80% worth of the original value.

Analysis And Interpretation

If the company use the aggressive depreciation schedule then company change its assets every year. If a company change its assets every year then reason may be the short lifetime of the company’s assets. After a year the values of assets may be dropped up to 30%.

If the financial position of the company good then it influences this ratio very much. The company has the ability to change its assets on the end-life of the assets. But if the company financially not good then for buying new machinery and equipment company need to get a loan.

You can also learn more about:

Account receivable turnover ratio

 

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