Difference Between Accumulated Depreciation and Depreciation Expense

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 important for the sake of accuracy.

Accumulated Depreciation vs Depreciation Expense

The main difference between accumulated depreciation and depreciation expense is that accumulated depreciation refers to the overall loss in value of an asset over a particular period of time whereas depreciation expense refers to the cost that has been incurred on an asset during a particular year, and reported at the end of the year itself.

Accumulated depreciation is the sum total of all the depreciation that an asset has gone through during its entire life span. It includes several expenses such as salaries, wages, travel, rent, and much more. 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, instead of the balance sheet, depreciation expense is represented in the final income statement.

Comparison Table Between Accumulated Depreciation and Depreciation Expense

What is Accumulated Depreciation?

It is a known fact that the value of assets is bound to decrease over time. This total reduction in value 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 is necessary to 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 taken into account, it usually turns up to be a hefty 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 salvage value of the asset from its original cost. This amount is then divided by the total life span 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 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 takes a particular time interval into account. 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.

There are many popular methods that 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 being calculated.

Other methods include the declining balance method, double declining balance method, and the ‘sum of the years’ digit’ method. Each of them is based on the idea that depreciation is inherently greater 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

Conclusion

Accumulated depreciation and depreciation expense are two very important concepts in the field of accountancy. Each of them has a similar nature. They both deal with the loss of value of assets. However, a major difference between them is that accumulated depreciation takes into account the entire life span of the asset up until the point of calculation. On the other hand, depreciation expense only deals with a particular financial period such as a quarter year or an entire year.

Another notable distinguishing factor is that accumulated depreciation is credited in the balance sheet whereas depreciation expense is debited in the income statement.

References

ncG1vNJzZmiZo6Cur8XDop2fnaKau6SxjZympmeUnrOnsdGepZydXZeytcPEnqVmmZOYwq7By5qrnpxdmbKxvsScoJqsmaS7bq3NnWSdnaCnsqS1wK2gqKZdmsWxsc2snGavmam1bsDAm6OeZw%3D%3D