The difference between depreciation expense and accumulated depreciation
/What is Depreciation Expense?
Depreciation expense is the periodic depreciation charge that a business takes against its assets in each reporting period. The intent of this charge is to gradually reduce the carrying amount of fixed assets as their value is consumed over time. In essence, an expenditure for a fixed asset is initially recorded as a long-term asset, and is then charged to expense through the income statement over the estimated useful life of the asset. The useful life of the asset and the depreciation method used on it are generally set based on the fixed asset classification to which it is assigned (such as Furniture and Fixtures or Vehicles).
What is Accumulated Depreciation?
Accumulated depreciation is the cumulative amount of depreciation that has piled up since the initiation of depreciation for each asset. This information is stored in a contra asset account, which effectively reduces the balance of the fixed asset account with which it is paired. If a fixed asset is held for the duration of its useful life, then the amount of accumulated depreciation stated on the organization’s books will match its total cost, resulting in a net recorded value of zero.
Comparing Depreciation Expense and Accumulated Depreciation
The following differences apply to the two concepts:
Financial statement presentation. Depreciation expense appears on the income statement, while accumulated depreciation appears on the balance sheet.
Account position. The balance in the depreciation expense account is a debit, while the balance in the accumulated depreciation account is a credit.
Presentation positioning. Depreciation expense is a separate and independent line within the income statement, while accumulated depreciation is paired with and offsets the fixed assets line item on the balance sheet. Depreciation expense may be further subdivided on the income statement into a portion that applies to the cost of goods sold, and another portion that applies to general and administrative expenses.
Subsequent accounting treatment. The depreciation expense for an asset is halted when the asset is sold, while accumulated depreciation is reversed when the asset is sold.
Related AccountingTools Courses
Example of Depreciation Expense and Accumulated Depreciation
Quest Adventure Gear buys an automated industrial sewing machine for $60,000, which it expects to operate for the next five years. Quest uses straight-line depreciation. Based on the 60-month useful life of the machine, Quest will charge $12,000 of this cost to depreciation expense in each of the next five years. At the end of the first year, the related amount of accumulated depreciation will be $12,000, followed by $24,000 at the end of the second year, $36,000 at the end of the third year, $48,000 at the end of the fourth year, and $60,000 at the end of the fifth year.