What is Accumulated Depreciation?
Accumulated Depreciation is the total cost allocation for depreciation expense by the company since the time the asset has been put into use. It is essentially a contra asset account that is reported in the company’s balance sheet, thereby meaning that it has a credit balance.
Accumulated Depreciation is shown as the reduction from the gross amount of fixed assets reported on the balance sheets. The Accumulated Depreciation is calculated as-.
SLD= Asset Cost−Salvage Value
Useful Life
where:
SLD = Straight Line Depreciation
The accumulated depreciation of an asset will increase over time against the burgeoning credit of depreciation expense allocated to the asset. Once the asset is eventually sold or put out of use, the accumulated depreciation for the asset will deplete and subsequently be eliminated from all the records of a company’s balance sheets.
Accumulated Depreciation is used in calculating the net book value of an asset. However, it is not always indicative of an asset’s market value. Companies always keep in mind that an asset’s accumulated depreciation should not exceed its cost. If it happens, it means the asset has become a liability and is disposed of or put out of use.
What is Depreciation Expense?
Depreciation Expense refers to the amount of the cost of the fixed assets that the company has already allocated for an appropriate time. It is ascertained as a non-cash expense in the company’s income statements. It reduces the company’s net income.
Depreciation Expense is recognized as a non-cash expense because recurring and consecutive depreciation entries do not include cash transactions. The depreciation expense is debited for accounting objectives, and the accumulated depreciation is credited.
Simple Depreciation methods include a straight line, double-declining balance, and production units. Apart from that, there is also a declining balance method:
DBD = (NBV – SV)× 1 ×DR
UL
where:
NBV = Net book value
SV = Salvage value
UL = Useful life
DR = Depreciation rate
Double Declining Method (DDB) is unarguably one of the most popular methods of calculating depreciation expense where the depreciation rate is calculated as 2 in the above formula.
Depreciation Expense is not a current asset. It is recorded in its income statements like any other normal business expense. It is very intrinsic for companies to calculate the depreciation expense because it helps them determine which asset is of value and which can be thrown away.
Difference Between Accumulated Depreciation and Depreciation Expense
- Accumulated Depreciation is recorded as the total sum of depreciation expense for an asset. Depreciation Expense is the number of costs allocated to an asset over a single period.
- Accumulated Depreciation is represented in balance sheets. Depreciation Expense is recorded in the income statements of the company.
- Accumulated Depreciation refers to the depreciation of the asset up to this point, whereas Depreciation Expense refers to the wearing of the asset for a particular period.
- There is only one method to calculate Accumulated Depreciation. There are three methods to calculate Depreciation Expense.
- The company uses Accumulated Depreciation to calculate the net book value of an asset that may or may not be reflective of the asset’s market value. The Depreciation Expense is calculated to ensure the item’s validity for liquidation purposes and vitality.
Comparison Between Accumulated Depreciation and Depreciation Expense
| Parameters of Comparison | Accumulated Depreciation | Depreciation Expense |
| Definition | Accumulated Depreciation refers to the cumulative depreciation of a company asset up to a single point of time in its existence. | Depreciation Expense refers to the wear and tear of the asset over a single period. |
| Documentation | Accumulated Depreciation is recorded in the balance sheet. | Depreciation Expense is recorded in the income statements. |
| Purpose | It is used to calculate an asset’s net book value. Accumulated Depreciation is subtracted from the asset’s historical cost value. This difference is known as the net book value. The netbook value is the amount at which depreciable assets are carried on the company balance sheet. | Depreciation Expense is used to check the item’s validity for year-end tax purposes and liquidation processes. |
| Period | The period of depreciable assets covered in Accumulated Depreciation is longer than in Depreciation Expenses. | Here, the time is shorter and covers a quarter or half of a year. |
| Terminology | Accumulated Depreciation is not an expense. | Depreciation Expense is not an asset. |