Estimating asset depreciation is a crucial component of accounting. It assists in determining their exact and correct value. This is also beneficial in methods such as taxation. Depreciation expense and accumulated depreciation are two types of depreciation that differ in several ways. It is critical to be aware of them just for accuracy.
Accumulated Depreciation vs Depreciation Expense
“Accumulated Depreciation” is the total depreciation expense accumulated over time and appears on the balance sheet, while “Depreciation Expense” represents the cost allocated for depreciation in a specific accounting period, appearing on the income statement.
Accumulated depreciation is the total depreciation expense that an asset has experienced over its entire life span. It covers various costs, including salaries, wage rates, travel, rent, etc. This amount is also deducted from the asset’s original cost. On the balance sheet, this leads to a negative value representation.
Depreciation expense, on the other hand, is only concerned with the valuation of an asset over time. This could be for a full year or maybe even a quarter of a year. This, like the previous, is an outlay. On the other hand, depreciation expense is reported in the ultimate income statement rather than on the balance sheet.
Comparison Table Between Accumulated Depreciation and Depreciation Expense
| Parameters of Comparison | Accumulated Depreciation | Depreciation Expense |
|---|---|---|
| Definition | The cumulative total of depreciation expenses recorded over time. | The portion of an asset’s cost allocated as an expense in a specific accounting period. |
| Presentation | Appears on the balance sheet as a contra-asset account, reducing the asset’s carrying value. | Appears on the income statement as an expense, reducing net income. |
| Purpose | Reflects the total amount by which an asset’s value has been reduced due to depreciation. | Represents the cost of using and consuming assets during a specific accounting period. |
| Timing | Accumulated over multiple accounting periods, continuously increasing. | Calculated and recorded for each accounting period as part of the income statement. |
| Financial Statements | Included in the balance sheet as a deduction from the asset’s original cost. | Included in the income statement, affecting net income and retained earnings. |
| Permanent vs. Temporary | Permanent account, as it carries forward balances from period to period. | Temporary account that is closed at the end of each accounting period. |
| Impact on Net Income | Does not directly affect net income; it indirectly impacts it by reducing the carrying value of assets. | Reduces net income for the specific accounting period in which it is recorded. |
| Reflects Asset’s History | Shows the historical reduction in the value of an asset. | Reflects the current period’s allocation of an asset’s cost as an expense. |
What is Accumulated Depreciation?
It is common knowledge that the price of an asset will depreciate over time. Accumulated depreciation is the term for this total loss of value. It considers the asset’s entire life cycle up to the point at which accumulated depreciation is determined.
This amount must be depicted in the balance sheet at the year’s close once it has been calculated. The total always ends up being negative. However, since depreciation is largely an expense, this is the case. Furthermore, because the asset’s entire life span is considered, it becomes a large number.
There are several methods for calculating accumulated depreciation. The straight-line method is the most popular. Simply, it entails deducting the asset’s salvage value from its original cost. This quantity would then be divided by the asset’s total life span.
The double-declining balance method is another option. It’s identical to the earlier one. The only difference would be that the denominator is “1 divided by the asset’s useful life in years, multiplied by 2.” The amount is then credited to the balance sheet after it has been calculated.
What is Depreciation Expense?
Depreciation expense is also concerned with the loss of value of an asset. Unlike the former, however, depreciation expense only considers a specific time interval. This could be done on a quarterly or annual basis. It is also billed as an expense.
The amount is then displayed in the income statement after it has been calculated. This is completed at the close of the financial period. Furthermore, the sum is classified as a non-cash expense. This is because it excludes any cash outflow. Nonetheless, it lowers the organization’s net income.
There are several widely used methods for calculating depreciation expenses. The straight-line method is one of them. This is done by subtracting the asset’s salvage value from its initial cost. This sum is then divided by the time interval over which depreciation is computed.
The declining – balance, the double accumulated depreciation method, and the sum of the years’ digit’ method are some of the other methods. Each is based on the premise that devaluation is inherently higher within the first few years of an asset’s use. Regardless, the determined amount is deducted from the income statement at the close of the financial period.
Main Differences Between Accumulated Depreciation and Depreciation Expense
- Accumulated depreciation is the total of all an asset has experienced, while depreciation expense is an expense borne on an asset during a specific interval.
- Accumulated depreciation is estimated for the complete life of the asset, whereas depreciation expense is calculated for a specific year or quarter of a year, whereas
- Accumulated depreciation is reported on the income statement, although depreciation expense is reported on the balance sheet.
- Accumulated depreciation is credited, while depreciation expense is debited.
- Accumulated depreciation is estimated by subtracting the salvage value from the initial price and dividing it by the asset’s life span. In contrast, depreciation expense is computed by deducting the salvage value from the original cost and dividing it by the asset’s life span.
References
- https://egrove.olemiss.edu/cgi/viewcontent.cgi?article=3041&context=wcpa
- https://www.degruyter.com/document/doi/10.1515/9781547400638-007/html
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