Depreciation Expense vs Accumulated Depreciation: What’s the Difference?

accumulated depreciation vs depreciation expense

The book value of an asset is calculated by subtracting its accumulated depreciation from its original cost. Since the salvage value is assumed to be zero, the depreciation expense is evenly split across the ten-year useful life (i.e. “spread” across the useful life assumption). In order to calculate the depreciation expense, which will reduce the PP&E’s carrying value each year, the useful life and salvage value assumptions are necessary.

  1. Accumulated depreciation is recorded in a contra asset account, meaning it has a credit balance, which reduces the gross amount of the fixed asset.
  2. Get instant access to video lessons taught by experienced investment bankers.
  3. When an asset is sold, its cost and accumulated depreciation are removed from the balance sheet, and any gain or loss on the sale is recorded.
  4. Depreciation expense is not a current asset; it is reported on the income statement along with other normal business expenses.

For example, a company purchased a piece of printing equipment for $100,000 and the accumulated depreciation is $35,000, then the net book value of the printing equipment is $65,000. Depreciation is an accounting entry that reflects the gradual reduction of an asset’s cost over its useful life. Depreciation expense and accumulated depreciation are integral components of the accounting process that reflect the allocation of an asset’s cost over time. Depreciation expense shows the current period allocation of the cost, while accumulated depreciation accumulates over time, representing the total depreciation recognized since the acquisition of the asset. When an asset is sold, its cost and accumulated depreciation are removed from the balance sheet, and any gain or loss on the sale is recorded.

Is Depreciation Expense an Asset or Liability?

In our PP&E roll-forward, the depreciation expense of $10 million is recognized across the entire forecast, which is five years in our illustrative model, i.e. half of the ten-year useful life. The purpose of depreciation is to match the timing of the purchase of a fixed asset (“cash outflow”) to the economic benefits received (“cash inflow”). For example, Company A buys a company vehicle in Year 1 with a five-year useful life. Regardless of the month, the company will recognize six months’ worth of depreciation in Year 1. Subsequent years’ expenses will change as the figure for the remaining lifespan changes.

The basic idea is that the same amount of depreciation expense is recognized each year, spreading the cost evenly over the asset’s estimated useful life. Read our article for more information about how to calculate straight-line depreciation. Depreciation expense is not a current asset; it is reported on the income statement along with other normal business expenses. If an asset is sold or disposed of, the asset’s accumulated depreciation is removed from the balance sheet. Net book value, however, isn’t necessarily reflective of the market value of an asset.

Various methods, such as straight line, declining balance, sum-of-the-years’ digits, and units of production, are used to calculate depreciation. One of the main distinctions between depreciation expense vs accumulated depreciation is that sales invoice template depreciation expense is recognized on the income statement for a specific period. Meanwhile, accumulated depreciation is the cumulative total of depreciation recognized over the entire life of the asset, shown on the balance sheet.

Accumulated depreciation is a measure of the total wear on a company’s assets. In other words, it’s the total of all depreciation expenses incurred to date. Depreciation expense is reported on the income statement as any other normal business expense. If the asset is used for production, the expense is listed in the operating expenses area of the income statement. This amount reflects a portion of the acquisition cost of the asset for production purposes.

Units of Production Method

The purchased PP&E’s value declined by a total of $50 million across the five-year time frame, which represents the accumulated depreciation on the fixed asset. This change is reflected as a change in accounting estimate, not a change in accounting principle. For example, say a company was depreciating a $10,000 asset over its five-year useful life with no salvage value. Using the straight-line method, an accumulated depreciation of $2,000 is recognized.

accumulated depreciation vs depreciation expense

So, depreciation expense would decline to $5,600 in the second year (14/120) x ($50,000 – $2,000). The simplest way to calculate this expense is to use the straight-line method. The formula for this is (cost of asset minus salvage value) divided by useful life.

The equipment’s residual value is $25,000, with an expected useful life of 10 years. The yearly depreciation expense using straight-line depreciation would be $22,500 per year. The philosophy behind accelerated depreciation is that newer assets, such as a new company vehicle, are often used more than older assets because they are in better condition and more efficient. Depreciation expense is the amount that a company’s assets are depreciated for a single period (e.g,, quarter or the year). Accumulated depreciation, on the other hand, is the total amount that a company has depreciated its assets to date. Yet, the capital expenditure (Capex) must be spread across the useful life of the fixed asset per the matching principle, i.e. the number of years in which the fixed asset is expected to provide benefits.

Is Accumulated Depreciation a Current Liability?

Since the asset has a useful life of 5 years, the sum of year digits is 15 (5+4+3+2+1). Under the sum of years digits method, a company strives to record more depreciation earlier in the life of an asset and less in the later years. This is done by adding up the digits of the useful years and then depreciating based on that number of years. Accumulated depreciation can be located on a company’s balance sheet below the line for related capitalized assets.

Depreciation expense is the amount of depreciation that is reported on the income statement. In other words, it is the amount of an asset’s cost that has been allocated and reported as an expense for the period (year, month, etc.) shown in the income statement’s heading. Accumulated depreciation is the total amount a company depreciates its assets, while depreciation expense is the amount a company’s assets are depreciated for a single period.

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