An important aspect of accounting is calculating the depreciation of assets. It helps in discerning their precise and correct value. This further proves to be useful in processes such as taxation.
Accumulated depreciation and depreciation expense are two kinds of depreciation that have several differences between them. Knowing them is essential for the sake of accuracy.
Key Takeaways
- Accumulated depreciation represents the total depreciation of an asset since its acquisition, while depreciation expense is the amount allocated for a specific accounting period.
- Accumulated depreciation is a contra-asset account, reducing the asset’s value on the balance sheet, whereas depreciation expense appears as an expense on the income statement.
- Accumulated depreciation increases over time, while depreciation expense is constant for straight-line depreciation or varies for other depreciation methods.
Accumulated Depreciation vs Depreciation Expense
Depreciation expense is recorded on the income account for an exact accounting period, while accumulated depreciation is a running total recorded on the balance sheet. Depreciation expense reduces a company’s taxable income, while accumulated depreciation reduces the asset’s carrying value.
Accumulated depreciation is the sum total of all the depreciation that an asset has gone through during its entire lifespan. It includes several expenses such as salaries, wages, travel, rent, etc.
Further, this amount is deducted from the original cost of an asset. It results in a negative value representation in the balance sheet.
Meanwhile, depreciation expense only deals with the depreciation of an asset during a particular interval. This may be an entire year or even a quarter year. Like the former, this is an expense as well.
However, the final income statement represents depreciation expense instead of the balance sheet.
Comparison Table
| Parameters of Comparison | Accumulated Depreciation | Depreciation Expense |
|---|---|---|
| Meaning | Period | It is the cost that has been incurred on an asset during a particular interval. |
| It is calculated for the entire lifespan of the asset. | It is calculated by subtracting the salvage value from the original cost and then dividing it by the asset’s life span. | It is calculated for a particular year or the quarter of a year. |
| Representation | It is represented in the balance sheet. | It is represented in the income statement. |
| Nature | It is credited. | It is debited. |
| Calculation | It is calculated by subtracting the salvage value from the original cost and dividing it by the respected time span. | It is calculated by subtracting the salvage value from the original cost and dividing it by the respective period. |
What is Accumulated Depreciation?
It is a known fact that the value of assets is bound to decrease over time. This total reduction in weight is termed accumulated depreciation.
It takes into account the entire life span of the asset, up until the point at which the accumulated depreciation is calculated.
Once this amount is calculated, it must be represented in the balance sheet at the end of the year. The amount always turns out to be negative.
This is because depreciation is essentially an expense. Moreover, since the entire life span of the asset is considered, it turns up to be a big number.
Accumulated depreciation can be calculated using several methods. The most popular one is the straight-line method. In simple terms, it includes subtracting the asset’s salvage value from its original cost.
This amount is then divided by the total lifespan of the asset.
Another method is the double-declining balance method. It is very similar to the former.
The only difference is that the divisor is taken as ‘1 divided by the years of the useful life of the asset, which is then multiplied by 2’. After the amount is calculated, it is credited to the balance sheet.
What is Depreciation Expense?
Depreciation expense also deals with the reduction of value that an asset goes through. However, unlike the former, depreciation expense only considers a particular time interval.
This could be on a quarterly basis or an entire year. Further, it is charged as an expense.
Once the amount is calculated, it is represented in the income statement. This is done at the end of the respective fiscal period.
Moreover, the amount falls under the category of non-cash expenses. This is because it does not include any cash outflow. Yet, it reduces the amount of net income of the organization.
Many popular methods are used universally to calculate depreciation expenses. One of them is the straight-line method.
This involves subtracting the salvage value of the asset from its original cost. Further, this amount is divided by the time interval for which the depreciation is calculated.
Other methods include the declining balance method, the double declining balance method, and the ‘sum of the years’ digit’ method.
Each is based on the idea that depreciation is inherently more significant in the first few years when an asset is used. Regardless, the calculated amount is debited in the income statement at the end of the fiscal period.
Main Differences Between Accumulated Depreciation and Depreciation Expense
- Accumulated depreciation is the total of all the depreciation that an asset has gone through. In contrast, depreciation expense is the cost incurred on an asset during a particular interval.
- Accumulated depreciation is calculated for the entire life span of the asset, whereas depreciation expense is calculated for a particular year or the quarter of a year.
- Accumulated depreciation is in the balance sheet, whereas depreciation expense is in the income statement.
- Accumulated depreciation is credited, whereas depreciation expense is debited.
- Accumulated depreciation is calculated by subtracting the salvage value from the original cost and dividing it by the asset’s life span. In contrast, depreciation expense is calculated by subtracting the salvage value from the original cost and dividing it by the respective time span.
- https://egrove.olemiss.edu/cgi/viewcontent.cgi?article=3041&context=wcpa
- https://www.degruyter.com/document/doi/10.1515/9781547400638-007/html
Last Updated : 13 July, 2023
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
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