What Is Average Inventory?

Average inventory is a calculation that estimates the value or number of a particular good or set of goods during two or more specified time periods. Average inventory is the mean value of inventory within a certain time period, which may vary from the median value of the same data set, and is computed by averaging the starting and ending inventory values over a specified period.

Understanding Average Inventory

Inventory is the value of all the goods ready for sale or all of the raw materials to create those goods that are stored by a company. Successful inventory management is a key focal point for companies as it allows them to better manage their overall business in terms of sales, costs, and relationships with their suppliers.

Since two points do not always accurately represent changes in inventory over different time periods, average inventory is frequently calculated by using the number of points needed to more accurately reflect activities across a certain amount of time.

For instance, if a business was attempting to calculate the average inventory over the course of a fiscal year, it may be more accurate to use the inventory count from the end of each month, including the base month. The values associated with each point are added together and divided by the number of points, in this case, 13, to determine the average inventory.

The average inventory figures can be used as a point of comparison when looking at overall sales volume, allowing a business to track inventory losses that may have occurred due to theft or shrinkage, or due to damaged goods caused by mishandling. It also accounts for any perishable inventory that has expired.

The formula for average inventory can be expressed as follows:

Average Inventory = (Current Inventory + Previous Inventory) / Number of Periods

Average inventory is used often in ratio analysis; for instance, in calculating inventory turnover.

Moving Average Inventory

A company may choose to use a moving average inventory when it’s possible to maintain a perpetual inventory tracking system. This allows the business to adjust the values of the inventory items based on information from the last purchase.

Effectively, this helps compare inventory averages across multiple time periods by converting all pricing to the current market standard. This makes it similar to adjusting historical data based on the rate of inflation for more stable market items. It allows simpler comparisons on items that experience high levels of volatility.

Example of Average Inventory

A shoe company is interested in better managing its inventory. The current inventory in its warehouse is equal to $10,000. This is in line with the inventory for the three previous months, which were valued at $9,000, $8,500, and $12,000.

When calculating a three-month inventory average, the shoe company achieves the average by adding the current inventory of $10,000 to the previous three months of inventory, recorded as $9,000, $8,500 and $12,000, and dividing it by the number of data points, as follows:

Average Inventory = ($10,000 + $9,000 + $8,500 + $12,000) / 4

This results in an average inventory of $9,875 over the time period being examined.

What Is an Account Number?

An account number is a unique string of numbers and, sometimes, letters and other characters that identify the owner of an account and grant access to it. In the U.S., the Social Security number was the primary identifier until its vulnerability to identity theft forced the practice to be abandoned. In today’s electronic age, the most important account number for many people is the checking account number.

How an Account Number Works

The checking account number is located at the bottom of the paper check. You’ll see three sets of numbers in a computer-readable font at the bottom of the check:

• The first number on the left is the nine-digit bank routing number.
• The middle number is your account number.
• The third number is the number of the check.

Payroll processing offices use checking account numbers to set up direct deposit payments for employees.

In addition to checks, account numbers are attached to just about any transaction a consumer or business can make. Sales receipts, subscription services, credit card accounts, and store club memberships all have them.

Protecting Account Numbers

Identification numbers, in addition to passwords, are vulnerable to identity theft and fraud. This is why we have to answer annoying questions about our mothers’ maiden names when we try to make routine changes to an account. The means of making it difficult for hackers to steal account numbers currently are taking the form of password managers along with multi-factor authentication systems.

Modern businesses now often employ a hard-to-hack master password to unlock an electronic vault of customers’ account numbers and other sensitive data. Consumers are becoming accustomed to multifactor authentication, which adds another step before accessing an account, such as a fingerprint, voice activation, or a time-sensitive code sent to the cellphone number on record.

These are just some of the means of protecting users’ account numbers in an increasingly vulnerable online environment.

Account Number vs. Routing Number

On a paper check, the nine-digit routing number identifies specific financial institutions within the U.S. The number identifies the check as having been issued by a federal- or state-chartered bank that maintains an account with the Federal Reserve.

This system dates back to 1910 and was developed initially as a way to help bank clerks sort through piles of checks and assign them to the correct drawer. Today, electronic services use them in much the same way for wire transfers, to draw a payment from a deposit at the correct institution.

The account number works together with the routing number to identify the right account holder at the right institution.

How to Locate Your Account Number

You can find your account number on your monthly bank statement, or by visiting a branch of your bank.

If you are using a checking account, the account number is also printed on your paper checks. You can find it printed between the bank’s routing number and the check number, as shown below.

The Bottom Line

An account number is a unique identifier for each account at a bank or other financial institution that you have. Along with the routing number, this number is used to make payments and deposits. Due to the increase in identity theft and fraud, it is important to protect your account number and other banking information.

What Is Accumulated Depreciation?

Accumulated depreciation is the cumulative depreciation of an asset up to a single point in its life. Accumulated depreciation is a contra asset account, meaning its natural balance is a credit that reduces the overall asset value.

Understanding Accumulated Depreciation

The matching principle under generally accepted accounting principles (GAAP) dictates that expenses must be matched to the same accounting period in which the related revenue is generated. Through depreciation, a business will expense a portion of a capital asset’s value over each year of its useful life. This means that each year a capitalized asset is put to use and generates revenue, the cost associated with using up the asset is recorded.

Accumulated depreciation is the total amount an asset has been depreciated up until a single point. Each period, the depreciation expense recorded in that period is added to the beginning accumulated depreciation balance. An asset’s carrying value on the balance sheet is the difference between its historical cost and accumulated depreciation. At the end of an asset’s useful life, its carrying value on the balance sheet will match its salvage value.

When recording depreciation in the general ledger, a company debits depreciation expense and credits accumulated depreciation. Depreciation expense flows through to the income statement in the period it is recorded. Accumulated depreciation is presented on the balance sheet below the line for related capitalized assets. The accumulated depreciation balance increases over time, adding the amount of depreciation expense recorded in the current period.

How to Calculate Accumulated Depreciation

There are several acceptable methods for calculating depreciation. These methods are allowable under Generally Accepted Accounting Principles (GAAP). A company may select the depreciation method they wish to use.

Straight-Line Method

Under the straight-line method of accounting, a company deducts the asset’s salvage value from the purchase price to find a depreciable base. Then, this base is accumulated evenly over the anticipated useful life of the asset. The straight-line method formula is:

Annual Accumulated Depreciation = (Asset Value – Salvage Value) / Useful Life in Years

Imagine Company ABC buys a building for $250,000. The building is expected to be useful for 20 years with a value of $10,000 at the end of the 20th year. The depreciable base for the building is $240,000 ($250,000 – $10,000). Divided over 20 years, the company would recognized $20,000 of accumulated depreciation every year. 

Declining Balance Method

Under the declining balance method, depreciation is recorded as a percentage of the asset’s current book value. Because the same percentage is used in every year while the current book value decreases, the amount of depreciation decreases each year. Even though accumulated depreciation will still increase, the amount of accumulated depreciation will decrease each year.

Annual Accumulated Depreciation = Current Book Value * Depreciation Rate

For example, imagine Company ABC buys a company vehicle for $10,000 with no salvage value at the end of its life. The company decided it would depreciate 20% of the book value each year. In Year 1, Company ABC would recognize $2,000 ($10,000 * 20%) of depreciation and accumulated depreciation. In Year 2, Company ABC would recognize $1,600 (($10,000 – $2,000) * 20%).

Double-Declining Balance Method

Under the double-declining balance (also called accelerated depreciation), a company calculates what it’s depreciation would be under the straight-line method. Then, the company doubles the depreciation rate, keeps this rate the same across all years the asset is depreciated, and continues to accumulate depreciation until the salvage value is reached. The percentage can simply be calculated as twice of 100% divided by the number of years of useful life.

Double-Declining Balance Method Rate = (100% / Useful Life In Years) * 2

Double-Declining Balance Method = Depreciable Amount * Double-Declining Balance Method Rate

Let’s imagine Company ABC’s building they purchased for $250,000 with a $10,000 salvage value. Under the straight-line method, the company recognized 5% (100% depreciation / 20 years); therefore, it would use 10% as the depreciation base for the double-declining balance method. The company would recognize $24,000 ($240,000 depreciable base * 10%) in Year 1, and would recognize $21,600 (($240,000 depreciable base – $24,000) * 10%).

Sum-of-the-Years’ Digits Method

Under the sum-of-the-years’ digits method, a company strives to record more depreciation earlier in the life of an asset and less in the later years. This is done by adding up the digits of the useful years, then depreciating based on that number of year.

Annual Accumulated Depreciation = Depreciable Base * (Inverse Year Number / Sum of Year Digits)

Company ABC purchased a piece of equipment that has a useful life of 5 years. The asset has a depreciable base of $15,000. Since the asset has a useful life of 5 years, the sum of year digits is 15 (5+4+3+2+1). The depreciation rate is then the quotient of the inverse year number (Year 1 = 5, Year 2 = 4, Year 3 = 3, etc.) divided by 15. In Year 1, the company will recognize $5,000 ($15,000 * (5/15)) of depreciation and will recognize $4,000 ($15,000 * (4/15)) in Year 2.

Units of Production Method

Under the units of production method, a company estimates the total useful output of an asset. Then, the company evaluates how many of those units were consumed each year to recognize accumulated depreciation variably based on use. The formula for the units of production method is:

Annual Accumulated Deprecation = (Number of Units Consumed / Total Units To Be Consumed) * Depreciable Base

For example, a company buys a company vehicle and plans on driving the vehicle 80,000 miles. In the first year, the company drove the vehicle 8,000 miles. Therefore, it would recognize 10% (8,000 / 80,000) of the depreciable base. In the second year, if the company drives 20,000 miles, it would recognize 25% of depreciable base as an expense in the second year, with accumulated depreciation now equal to $28,000 ($8,000 in the first year + $20,000 in the second year).

Accumulated Depreciation vs. Accelerated Depreciation

Though similar sounding in name, accumulated depreciation and accelerated depreciation refer to very different accounting concepts. Accumulated depreciation refers to the life-to-date depreciation that has been recognized that reduces the book value of an asset. On the other hand, accelerated depreciation refers to a method of depreciation where a higher amount of depreciation is recognized earlier in an asset’s life.

Since accelerated depreciation is an accounting method for recognizing depreciation, the result of accelerated depreciation is to book accumulated depreciation. Under this method, the amount of accumulated depreciation accumulates faster during the early years of an asset’s life and accumulates slower later. The philosophy behind accelerated depreciation is assets that are newer (i.e. a new company vehicle) are often used more than older assets because they are in better condition and more efficient. 

Accumulated Depreciation vs. Depreciation Expense

When an asset is depreciated, two accounts are immediately impacted: accumulated depreciation and depreciation expense. The journal entry to record depreciation results in a debit to depreciation expense and a credit to accumulated depreciation. The dollar amount for each line is equal to the other.

There are two main differences between accumulated depreciation and depreciation expense. First, depreciation expense is reported on the income statement, while accumulated depreciation is reported on the balance sheet. 

Second, on a related note, the income statement does not carry from year-to-year. Activity is swept to retained earnings, and a company “resets” its income statement every year. Meanwhile, its balance sheet is a life-to-date running total that does not clear at year-end. Therefore, depreciation expense is recalculated every year, while accumulated depreciation is always a life-to-date running total.

Special Considerations

Accounting Adjustments/Changes in Estimate

Because the depreciation process is heavily rooted with estimates, it’s common for companies to need to revise their guess on the useful life of an asset’s life or the salvage value at the end of the asset’s life. This change is reflected as a change in accounting estimate, not a change in accounting principle. For example, say a company was depreciating a $10,000 asset over its five year useful life with no salvage value. Using the straight-line method, accumulated depreciation of $2,000 is recognized.

After two years, the company realizes the remaining useful life is not three years but instead six years. Under GAAP, the company does not need to retroactively adjust financial statements for changes in estimates. Instead, the company will change the amount of accumulated depreciation recognized each year. 

In this example, since the asset now has a $6,000 net book value ($10,000 purchase price less $4,000 of accumulated depreciation booked in the first two years), the company will now recognized $1,000 of accumulated depreciation for the next six years. 

Half-Year Recognition

A commonly practiced strategy for depreciating an asset is to recognize a half year of depreciation in the year an asset is acquired and a half year of depreciation in the last year of an asset’s useful life. This strategy is employed to more fairly allocate depreciation expense and accumulated depreciation in years when an asset may only be used part of a year. 

For example, Company A buys a company vehicle in Year 1 with a five year useful life. Regardless of the month, the company will recognize six months worth of depreciation in Year 1. The company will also recognize a full year of depreciation in Year 2 – 5. Then, the company will recognize the final half year of depreciation in Year 6. Although the asset only had a useful life of five years, it is argued that the asset wasn’t used for the entirety of Year 1 nor the entirety of Year 6.

Example of Accumulated Depreciation

Company A buys a piece of equipment with a useful life of 10 years for $110,000. The equipment is estimated to have a salvage value of $10,000. The equipment is going to provide the company with value for the next 10 years, so the company expenses the cost of the equipment over the next 10 years. Straight-line depreciation is calculated as (($110,000 – $10,000) / 10), or $10,000 a year. This means the company will depreciate $10,000 for the next 10 years until the book value of the asset is $10,000.

Each year the contra asset account referred to as accumulated depreciation increases by $10,000. For example, at the end of five years, the annual depreciation expense is still $10,000, but accumulated depreciation has grown to $50,000. That is, accumulated depreciation is a cumulative account. It is credited each year as the value of the asset is written off and remains on the books, reducing the net value of the asset, until the asset is disposed of or sold. It is important to note that accumulated depreciation cannot be more than the asset’s historical cost even if the asset is still in use after its estimated useful life.

The Bottom Line

Many companies rely on capital assets such as buildings, vehicles, equipment, and machinery as part of their operations. In accordance with accounting rules, companies must depreciate these assets over their useful lives. As a result, companies must recognize accumulated depreciation, the sum of depreciation expense recognized over the life of an asset. Accumulated depreciation is reported on the balance sheet as a contra asset that reduces the net book value of the capital asset section.