Understanding Accumulated Depreciation And Depreciation Expense

Depreciation is a term used in accounting to refer to the gradual decrease in the value of an asset over time. It is a process that reflects the wear and tear of the asset, the passage of time, or obsolescence. Two terms that are commonly used in depreciation are accumulated depreciation and depreciation expense. Accumulated depreciation refers to the total amount of depreciation that has been charged against an asset since it was acquired. On the other hand, depreciation expense is the amount of depreciation that is charged against an asset in a given period, usually a year. In this article, we will explore these two terms in detail.

Accumulated Depreciation

Accumulated depreciation is the total amount of depreciation that has been charged against an asset since it was acquired. It is a contra asset account, which means that it is deducted from the original cost of the asset to arrive at the net book value. The net book value is the value of the asset that is reported on the balance sheet.

For example, let us assume that a company acquired a machine for $50,000, and it has a useful life of 10 years. The company estimates that the salvage value of the machine is $5,000. The company will depreciate the machine using the straight-line method, which means that it will depreciate the machine by $4,500 ($50,000 - $5,000 / 10) every year. After three years, the accumulated depreciation of the machine will be $13,500 ($4,500 x 3). The net book value of the machine will be $36,500 ($50,000 - $13,500).

Depreciation Expense

Depreciation expense is the amount of depreciation that is charged against an asset in a given period, usually a year. The depreciation expense is calculated using a depreciation method that is chosen by the company. The most common depreciation methods are the straight-line method, the declining balance method, and the sum-of-the-years'-digits method.

Using the example above, the depreciation expense of the machine will be $4,500 every year for 10 years, using the straight-line method. The depreciation expense will be recorded in the income statement as an expense, which will reduce the net income of the company. The accumulated depreciation will be recorded in the balance sheet as a contra asset account, which will reduce the value of the asset.

Conclusion

Accumulated depreciation and depreciation expense are two terms that are commonly used in accounting to refer to the gradual decrease in the value of an asset over time. Accumulated depreciation is the total amount of depreciation that has been charged against an asset since it was acquired, while depreciation expense is the amount of depreciation that is charged against an asset in a given period. Understanding these two terms is essential for businesses to accurately report the value of their assets and their financial performance.