The concept of depreciation is an integral part of Accounting. The depreciation needs to be calculated in a business to know the accurate value of the asset. Depreciation expenses reflect the amount of asset utilised in the current year while accumulated depreciation is a measure of the total wear and tear that the asset accumulates since its inception.
What is Depreciation Expense?
Depreciation expense is the type of expense that is the amount of an asset’s cost that has been allocated and reported as an expense for the period in the income statement. It is a non-cash expense that reduces the company’s net income.
For financial statement purposes, the depreciation amount should be applied against the business’s income for the year on the income statement.
The calculation of depreciation expense follows the matching principle of accounting, which requires that revenues earned in an accounting period must always be matched with related expenses.
Four factors play a significant role in determining depreciation expense. They are:
- Asset cost
- Salvage Value
- The useful life of the asset
What is Accumulated Depreciation?
Accumulated depreciation is an aggregate of depreciation expenses of an asset until its lifetime. It gives an idea about the relative age of assets.
The amount of accumulated depreciation of an asset or group of assets will increase over time as depreciation expenses continue to be credited against the assets of the business.
Let us look at the most important points of difference between depreciation expense and accumulated depreciation in the following table.
|Parameters||Depreciation Expense||Accumulated Depreciation|
|Definition||Depreciation expense is the amount of cost of an asset that is allocated and reported at the end of the financial year||Accumulated depreciation is the total depreciation that is incurred for an asset|
|Debit or Credit||Depreciation expense is placed as a debit||Accumulated depreciation is represented as a credit|
|Representation in the book of accounts||Reported in the balance sheet||Reported in the Income statement|
|Sale of Asset||Depreciation expense halted when the asset is sold||Accumulated depreciation gets reversed when the asset is sold|
Also Check: What is Depreciation?
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