Difference Between Accumulated Depreciation and Depreciation Expense (With Table)

Accumulated Depreciation refers to the contra asset account that records an asset’s cumulative depreciation up to a single point in its life. It is the aggregate of the wear and tears on the asset from all prior periods. On the other side, Depreciation Expense is described as the amount that an organization or company’s assets are depreciated for a single period, for example, a quarter of a year.

Accumulated Depreciation vs Depreciation Expense

The main difference between Accumulated Depreciation and Depreciation Expense is that Accumulated Depreciation is reported on the balance sheet. In contrast, Depreciation Expense is recorded as an expense on the income statement. Accumulated Depreciation is documented as the ongoing total of depreciation expense on the balance sheet. Whereas, like any other normal business expense, Depreciation Expense finds its place in the income statement.

Accumulated Depreciation is the depreciation of an asset to date or the total amount of wear. Accumulated Depreciation is not an expense or cost. The period of recorded depreciation in Accumulated Depreciation is longer than in Depreciation Expense. Accumulated Depreciation is an important financial term to understand because the company determines the present value of an asset-based on it.

Depreciation Expense refers to the amount of depreciation of a company’s asset over a single period. Depreciation Expense is not an asset. It is often marked by an acronym ‘DE’ in books. Usually, only a single popular formula is used to calculate the Depreciation Expense. It helps determine whether a company product or equipment is an asset or a liability.

Comparison Table between Accumulated Depreciation and Depreciation Expense 

 Parameters of ComparisonAccumulated DepreciationDepreciation Expense
DefinitionAccumulated 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.
DocumentationAccumulated 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.

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.

Main Differences between Accumulated Depreciation and Depreciation Expense 

  1. Accumulated Depreciation is recorded as the total sum of depreciation expense for an asset. Depreciation Expense is the number of costs that have been allocated to an asset over a single period.
  2. Accumulated Depreciation is represented in balance sheets. Depreciation Expense is recorded in the income statements of the company.
  3. 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.
  4. There is only one method to calculate Accumulated Depreciation. There are three methods to calculate Depreciation Expense.
  5. 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.

Conclusion

There is a similarity between Accumulated Depreciation and Depreciation Expense; both calculate the wear and tear of an asset. Companies need to take care of the depreciation rate of an asset so that they can conclude whether it is financially advisable or not to keep the assets functioning.

Is it a white elephant, like a wasteful expenditure, or is it giving the returns expected to? It helps the company assess whether they should get rid of an asset or invest in other assets that would have greater returns. This is why Accumulated Depreciation and Depreciation expense is so important to judge the efficacy and durability of an asset.

References

  1. https://irjabs.com/files_site/paperlist/r_2425_141118225740.pdf
  2. https://e-journal.stiebinaniaga.ac.id/index.php/Accounting/article/download/178/145