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. 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. 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.Definition of Accumulated Depreciation
Example of Depreciation Expense and Accumulated Depreciation
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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.
| 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
June 01, 2022 June 01, 2022/ Steven Bragg
Accumulated depreciation is the total depreciation for a fixed asset that has been charged to expense since that asset was acquired and made available for use. The intent behind doing so is to approximately match the revenue or other benefits generated by the asset to its cost over its useful life (known as the matching principle).
The amount of accumulated depreciation for an asset will increase over time, as depreciation continues to be charged against the asset. The original cost of the asset is known as its gross cost, while the original cost of the asset less the amount of accumulated depreciation and any impairment charges is known as its net cost or carrying amount.
The accumulated depreciation account is an asset account with a credit balance (also known as a contra asset account). When the asset is eventually retired or sold, the amount in the accumulated depreciation account relating to that asset is reversed, as is the original cost of the asset, thereby eliminating all record of the asset from the company's balance sheet. If this derecognition were not completed, a company would gradually build up a large amount of gross fixed asset cost and accumulated depreciation on its balance sheet.
The balance in the accumulated depreciation account will increase more quickly if a business uses an accelerated depreciation methodology, since doing so charges more of an asset's cost to expense during its earlier years of usage. The use of accelerated depreciation makes it more difficult to judge how old a reporting entity’s fixed assets are, since the proportion of accumulated depreciation to fixed assets is higher than would normally be the case.
Presentation of Accumulated Depreciation
Accumulated depreciation appears on the balance sheet as a reduction from the gross amount of fixed assets reported. It is usually reported as a single line item, but a more detailed balance sheet might list several accumulated depreciation accounts, one for each fixed asset type. The latter form of presentation is more useful to an investor, since the proportion of accumulated depreciation to fixed assets provides an indicator of the age of the reporting entity’s fixed assets; for example, a high proportion of accumulated depreciation indicates that a firm’s fixed assets are old.
How to Calculate Accumulated Depreciation
Calculating accumulated depreciation is a simple matter of running the depreciation calculation for a fixed asset from its acquisition date to the current date. However, it is useful to spot-check the calculation of the depreciation amounts that were recorded in the general ledger over the life of the asset, to ensure that the same calculations were used to record the underlying depreciation transaction. For example, if an impairment charge was made against an asset, this reduces the carrying amount of the asset and may alter its remaining useful life; both changes would be reflected in the depreciation calculation, altering the amount charged to expense each month.
Example of Accumulated Depreciation
ABC International buys a machine for $100,000, which it records in the Machinery fixed asset account. ABC estimates that the machine has a useful life of 10 years and will have no salvage value, so it charges $10,000 to depreciation expense per year for 10 years. The annual entry, showing the credit to the accumulated depreciation account, is:
| Debit | Credit | |
| Depreciation expense | 10,000 | |
| Accumulated depreciation | 10,000 |
After 10 years, ABC retires the machine, and records the following entry to purge both the asset and its associated accumulated depreciation from its accounting records:
| Debit | Credit | |
| Accumulated depreciation | 100,000 | |
| Assets - Machinery | 100,000 |
Accumulated depreciation is incorporated into the calculation of an asset's net book value. To calculate net book value, subtract the accumulated depreciation and any impairment charges from the initial purchase price of an asset. The residual balance is the net book value of the asset. For example, an asset is acquired for $1,000,000. After three years, the company records an asset impairment charge of $200,000 against the asset. At that point, the accumulated depreciation for the asset is $300,000. This means that the asset’s net book value is $500,000 (calculated as $1,000,000 purchase price - $200,000 impairment charge - $300,000 accumulated depreciation).
Accumulated Depreciation vs. Depreciation Expense
Depreciation expense is a portion of the capitalized cost of an organization’s fixed assets that are charged to expense in a reporting period. It is recorded with a debit to the depreciation expense account and a credit to the accumulated depreciation contra asset account. One difference between the two concepts is that accumulated depreciation is stated on the balance sheet (as a subtraction from fixed assets), while depreciation expense appears on the income statement, usually within the operating expenses section. Another difference is that the depreciation expense for an asset is halted when the asset is sold, while accumulated depreciation is reversed when the asset is sold.
June 01, 2022/ Steven Bragg/