Recording Accumulated Depreciation
Recording accumulated depreciation takes place in the contra account every year. Overtime, when the company effects a sale of a business asset, the business sets off the actual loss incurred on the sale from the contra account, and removes the similar amount from the balance sheet and the contra amount. Any additional loss reflects as losses for the accounting year, and any gains as profits for the accounting year.
To illustrate, in the example of the car purchased for $40,000 quoted above, if the company has set off accumulated depreciation of $30,000 for the car over the years, and the car sells for $15,000 instead of $10,000, the sale price is $5,000 more than the accumulated depreciation of $30,000. The balance sheet then lists this $5,000 as profit. Similarly, if the sale of the car fetches only $8,000, the total loss from the sale of this asset is $32,000 and the additional $2,000 over the $30,000 set off in the accumulated depreciation contra account ($1000-$8000) is recorded as loss on the balance sheet.
Such methods provide ample scope for manipulating the balance sheet and can greatly distort the profit and loss of the company. The scope for distortions become even more as individual balance sheets rarely show accumulated depreciation, and rather list only a single line entry "Property, Plant, and Equipment - net" The accumulated depreciation charges usually find mention in the annual report or 10K statement.