What is the difference between accumulated depreciation and depreciation expense How are they related?

Depreciation expense is the amount of depreciation that is reported on the income statement. In other words, it is the amount of an asset's cost that has been allocated and reported as an expense for the period (year, month, etc.) shown in the income statement's heading.

Table of Contents Show

Definition of Accumulated Depreciation
Example of Depreciation Expense and Accumulated Depreciation
Free Financial Statements Cheat Sheet
What is Accumulated Depreciation?
What is Depreciation Expense?
Differences: Accumulated Depreciation and Depreciation Expense
What is Depreciation Expense?
What is Accumulated Depreciation?
Depreciation in General
Depreciation Expense
Accumulated Depreciation
Considerations

Definition of Accumulated Depreciation

Accumulated depreciation reports the total amount of depreciation that has been reported on all of the income statements from the time that the assets were put into service until the date of the balance sheet. The account Accumulated Depreciation is a contra asset account because it will have a credit balance. The credit balance is reported in the property, plant and equipment section of the balance sheet and it reduces the cost of the assets to their carrying value or book value.

Example of Depreciation Expense and Accumulated Depreciation

To illustrate, let's assume that a retailer purchases new display racks at a cost of $84,000. This asset is estimated to have a useful life of 7 years (84 months) and no salvage value at the end of 7 years. Assuming the retailer uses the straight-line depreciation method, during each month of the display racks' lives the retailer's monthly income statement will report depreciation expense of $1,000. However, the credit balance in Accumulated Depreciation will be reported on the balance sheet at $1,000 at the end of the first month, $2,000 at the end of the second month, $3,000 at the end of the third month, etc. until the balance in Accumulated Depreciation reaches $84,000 at the end of the 84th month.

Free Financial Statements Cheat Sheet

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Reporting financial information and paying taxes are important aspects of every size of business, no matter how big or how little. Therefore, maintaining accurate records of one's revenue in addition to one's expenditures is not an option but rather a necessary need in any kind of enterprise.

In the course of running a business, one of the expenditures that will be incurred is depreciation, which is the gradual loss in value of an asset that occurs over a period of time. This expense occurs regardless of the value of the firm's assets. As a result of this, it is essential to make a distinction between cumulative depreciation and the expenditure of depreciation.

What is Accumulated Depreciation?

This is the sum of all the wear and tear that an asset has experienced. It is subtracted from the cost of an asset when it was first purchased, and the resulting balance on the balance sheet is negative. It is absolutely necessary for the computation of the taxable gain that results from any transaction.

What is Depreciation Expense?

This is the total amount of an asset's cost that is assigned and reported at the conclusion of each reporting period. To determine it, start by deducting from the value of an asset at the time of its acquisition the value that the asset is expected to maintain until it is completely depleted. After that, divide the resulting number by the asset's life period. It is something that is recorded in the income statement, and it is beneficial for tax purposes since it lowers the amount of income that is taxable for a company.

Differences: Accumulated Depreciation and Depreciation Expense

Both of these are costs associated with depreciation. Both are helpful when considering tax implications. The following table highlights the major differences between Accumulated Depreciation and Depreciation Expense.

Characteristics	Accumulated Depreciation	Depreciation Expense
Definition	The whole amount of depreciation that has been sustained by an asset is referred to as its accumulated depreciation.	The amount of the cost of an asset that is assigned and reported at the end of each reporting period is referred to as the depreciated expense for that asset.
Reporting in the books of accounts	The balance sheet will include a report on the accumulated amount of depreciation.	The income statement includes a line item for the expense of depreciation.
Debit/Credit	Accumulated depreciation results in a credit.	A debit is created as a result of the remaining balance in the depreciation expenditure.
Computation	The total accumulated depreciation of an asset is subtracted from the cost of the asset when it was first purchased.	Depreciation expense is calculated by first determining the value of an asset at the time of its acquisition, then subtracting from that value the value that an asset is likely to retain when it is completely depleted, and finally dividing that result by the amount of time an asset is expected to remain in use.

Conclusion

The whole amount of depreciation that has been sustained by an asset is referred to as its accumulated depreciation. On the other hand, the amount of the cost of an asset that is assigned and reported at the end of each reporting period is the amount that is referred to as the depreciated expenditure. In order to ensure accurate reporting, it is critical to work closely with a certified public accountant while compiling financial records and books of account.

Updated on 18-Aug-2022 13:26:17

The concept of depreciation is an integral part of Accounting. The depreciation needs to be calculated in a business to know the accurate value of the asset. Depreciation expenses reflect the amount of asset utilised in the current year while accumulated depreciation is a measure of the total wear and tear that the asset accumulates since its inception.

What is Depreciation Expense?

Depreciation expense is the type of expense that is the amount of an asset’s cost that has been allocated and reported as an expense for the period in the income statement. It is a non-cash expense that reduces the company’s net income.

For financial statement purposes, the depreciation amount should be applied against the business’s income for the year on the income statement.

The calculation of depreciation expense follows the matching principle of accounting, which requires that revenues earned in an accounting period must always be matched with related expenses.

Four factors play a significant role in determining depreciation expense. They are:

Asset cost
Salvage Value
The useful life of the asset
Obsolescence

What is Accumulated Depreciation?

Accumulated depreciation is an aggregate of depreciation expenses of an asset until its lifetime. It gives an idea about the relative age of assets.

The amount of accumulated depreciation of an asset or group of assets will increase over time as depreciation expenses continue to be credited against the assets of the business.

Let us look at the most important points of difference between depreciation expense and accumulated depreciation in the following table.

Parameters	Depreciation Expense	Accumulated Depreciation
Definition	Depreciation expense is the amount of cost of an asset that is allocated and reported at the end of the financial year	Accumulated depreciation is the total depreciation that is incurred for an asset
Debit or Credit	Depreciation expense is placed as a debit	Accumulated depreciation is represented as a credit
Representation in the book of accounts	Reported in the balance sheet	Reported in the Income statement
Sale of Asset	Depreciation expense halted when the asset is sold	Accumulated depreciation gets reversed when the asset is sold

Also Check: What is Depreciation?

This article will be very helpful to students of Commerce to have a clear understanding of the difference between Depreciation Expense and Accumulated Depreciation. Stay tuned to BYJU’S for more such interesting updates.

Keeping track of depreciation is an important responsibility for all businesses, large or small. Depreciation expense reflects how much of an asset is used up in a given year, while accumulated depreciation is a measure of the total wear on the asset while it has been owned by the business. The two balances have implications for financial reporting and for taxes.

Depreciation in General

When a long-term asset is purchased, it does not make sense to recognize the purchasing price as an expense, because of the fact that it will be use for a prolonged period of time. Depreciation is an accounting method of spreading out the cost of these assets over the period in which the asset is useful. Depreciation is an important aspect of financial reporting and in preparing a business’s taxes.

Depreciation Expense

Depreciation expense is the amount of depletion, as expressed in dollars, that an asset had during the fiscal year. It is incredibly difficult to measure that exactly. The easiest way to measure how much that is by taking the value of the asset based on it cost of acquisition, subtracting the value the asset will retain when it is totally depleted, and divide that by the useful life of the asset in years. That amount equals the annual depreciation expense for the asset.

For financial statement purposes, this amount should be applied against the business’s income for the year on the income statement. For tax purposes, depreciation expense is an important deduction used to decrease a business’s taxable income. It is important to note that the for tax purposes there are alternative methods to calculating depreciation, and that you should consider all available options for your assets before committing to one methodology.

Accumulated Depreciation

Accumulated depreciation is a contra-asset equal to the total of all depreciation expense incurred relating to a long-term asset. On the balance sheet, an asset is carried at its acquisition value. The accumulated depreciation account is a negative balance on the balance sheet which allows for the asset account to reflect the acquisition cost of the asset while ensuring that the totals on the balance sheet reflect the value of the company. For tax purposes, accumulated depreciation is vital for calculating the taxable gain on a sale. A business’ basis, or investment in, an asset is decreased based on how much depreciation it takes while owned, or its accumulated depreciation. The difference between the adjusted basis and the proceeds received determine the gain or loss. Also, in some circumstances, the amount of proceeds that correlate to depreciation taken during the asset’s life may be “recaptured” or taxed at the higher ordinary tax rate in comparison to the standard capital rate.

Considerations

When preparing financial statements or tax returns, consult with a certified public accountant. This article does not provide specific legal advice; it is for educational purposes only. Use of this article does not create any attorney-client relationship.