How does accumulated depreciation affect the assets on a company's balance sheet?

Accumulated depreciation plays a crucial role in the accounting treatment of fixed assets on a company's balance sheet. It represents the total amount of depreciation expense that has been allocated to an asset over time since it was acquired. As a company uses its assets, their value naturally decreases due to wear and tear, obsolescence, and other factors.

When accumulated depreciation is recorded, it is subtracted from the gross value of the asset, effectively reducing its carrying amount on the balance sheet. This reduction reflects a more accurate value of the asset, aligning it with the economic reality of its diminishing useful life. Therefore, accumulated depreciation directly decreases the value of assets reported on the balance sheet, as it represents the portion of the asset that has been 'used up' over time.

This adjustment is crucial for stakeholders who rely on the balance sheet, as it offers a clearer picture of the company’s asset base and helps in assessing the company's financial health and operational efficiency.