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

Accumulated Depreciation vs. Depreciation Expense: Overview

Depreciation measures how quickly an asset loses value before it breaks down or becomes obsolete. Accumulated depreciation is the total amount of an asset’s original cost that has been allocated as a depreciation expense in the years since it was first placed into service. Depreciation expense is the amount that was depreciated for a single period.

Key Takeaways

• Depreciation is an accounting method that spreads out the cost of an asset over its useful life.
• Depreciation expense is the portion of the cost of an asset that has been depreciated for a single period, reflecting how much of its value was used up in that time.
• Accumulated depreciation is the total amount of depreciation expense that has been allocated for an asset since the asset was put into use.
• Depreciation expense is recognized on the income statement as a non-cash expense that reduces the company’s net income.
• Accumulated depreciation appears in a contra account on the balance sheet reducing the gross value of fixed assets reported.

Accumulated Depreciation

Accumulated depreciation represents the sum of all depreciation expenses for a particular asset as of a certain point in time. It is recorded on a company’s general ledger as a contra account and under the assets section of a company’s balance sheet as a credit. As such, it reduces the value of the company’s fixed assets.

The amount of accumulated depreciation for an asset or group of assets will increase over time as depreciation expenses continue to be recorded. When an asset is eventually sold or retired from use, reducing its value to $0, the accumulated depreciation associated with that asset will be removed the company’s balance sheet.

Depreciation Expense

A depreciation expense, on the other hand, is the portion of the cost of a fixed asset that was depreciated during a certain period, such as a year. Depreciation expense is recognized on the income statement as a non-cash expense that reduces the company’s net income or profit. For accounting purposes, the depreciation expense is debited, while the accumulated depreciation is credited.

Depreciation expense is considered a non-cash expense because it does not involve a cash transaction. Because of this, the statement of cash flows prepared under the indirect method adds the depreciation expense back to calculate cash flow from operations. The various methods used to calculate depreciation include straight line, declining balance, sum-of-the-years’ digits, and units of production, as explained below.

Note

Accumulated depreciation is the sum of the depreciation expenses for an asset for every reporting period that the company owned that asset.

Depreciation and Accumulated Depreciation Example

Tracking the depreciation expense of an asset is important for accounting and tax reporting purposes because it spreads the cost of the asset over the time it’s in use. That can have several advantages. For one, the Internal Revenue Service (IRS) doesn’t allow businesses to fully deduct the cost of many assets in the year they are purchased but instead requires that they be depreciated and deducted over a set number of years. (There is an exception for certain assets that qualify as Section 179 property.) From a company’s perspective, having to write off a large capital cost all at once could negatively distort its profit picture for that year.

The simplest way to calculate depreciation expense is the straight-line method. The formula is: (cost of asset minus salvage value) divided by useful life.

Say a company spent $25,000 for a piece of equipment to use in its operations. It estimates that the salvage value will be $2,000 and the asset’s useful life, five years. The depreciation expense per year would be $4,600.

($25,000 – $2,000)/5 = $4,600

The accumulated depreciation for the asset would be $4,600 for the first year and grow by another $4,600 in each subsequent year. Thus, after four years, accumulated depreciation would total $18,400.

After five years there would be nothing left to depreciate.

Accumulated Depreciation and Book Value

Accumulated depreciation is used to calculate an asset’s net book value, which is the value of an asset carried on the balance sheet. The formula for net book value is the cost of the asset minus accumulated depreciation.

For example, if 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.

$100,000 – $35,000 = $65,000

Accumulated depreciation cannot exceed an asset’s cost. If an asset is sold or disposed of, the asset’s accumulated depreciation is “reversed,” or removed from the balance sheet. Net book value isn’t necessarily reflective of the market value of an asset.  

Important

Depreciation expense is recorded on the income statement as an expense or debit, reducing net income. Accumulated depreciation is recorded in a contra account as a credit, reducing the value of fixed assets.

Depreciation Method Examples

The four methods allowed by generally accepted accounting principles (GAAP) are the aforementioned straight-line, along with declining balance, sum-of-the-years’ digits (SYD), and units of production.

To see how the calculations work, let’s use the earlier example of the company that buys equipment for $25,000, sets the salvage value at $2,000 and the useful life at five years.

For purposes of the units of production method, shown last here, the company’s estimate for units to be produced over the asset’s lifespan is 30,000 and actual units produced in year one equals 5,000.

The calculation for the straight-line method, as previously shown above, is (cost of asset – salvage value)/useful life:

($25,000 – $2,000)/5 = $4,600

So $4,600 will be the depreciation expense each year for the life of the asset.

The calculation for the declining balance method is current book value x depreciation rate, which in this case is 20%:

$25,000 x .20 = $5,000

The first year’s depreciation expense would be $5,000. Subsequent years’ expenses will change based on the changing current book value. For example, in the second year, current book value would be $25,000 – $5,000, or $20,000. Thus, depreciation expense would decline to $4,000 ($20,000 x .20).

This would continue each year until the amount of the deduction is less than or equal to the amount that would be obtained using the straight-line method, at which point it switches over to that method. So in this example, the declining balance method would only be advantageous for the first year.

In addition, there is another technique called the double-declining balance method that allows for an asset to be depreciated even faster, based on its straight-line depreciation amount multiplied by 200%. So in this example, the first-year depreciation could be $9,200.

The calculation for the sum-of-the-years’ digits (SYD) method is (remaining lifespan/SYD) x (asset cost – salvage cost), which works like this:

For an asset that’s being depreciated over five years, the sum-of-the-years’ digits would be 15 (1+2+3+4+5).

The formula for year one would be (5/15) x ($25,000 – $2,000) = $7,667. So the first year’s depreciation expense would be $7,667.

Subsequent years’ depreciation expenses will change as the number of years in the remaining lifespan changes. So, depreciation expense would decline to $6,133 in the second year, based on the calculation: (4/15) x ($25,000 – $2,000) = $6,133.

Finally, the calculation for the units of production method is (asset cost – salvage value)/estimated units over lifespan x actual units produced:

($25,000 – $2,000)/30,000 x 5,000 = $3,833.

The first year’s depreciation expense would be $3,833. Future years’ results will vary as the number of units actually produced varies.

What Is the Basic Formula for Calculating Accumulated Depreciation?

Accumulated depreciation is the total amount of depreciation expense recorded for an asset on a company’s balance sheet. It is calculated by summing up the depreciation expense amounts for each year up to that point.

Is Accumulated Depreciation an Asset or a Liability?

Accumulated depreciation is recorded in a contra account, meaning it has a credit balance, which reduces the gross amount of the fixed asset. As such, it is not recorded as an asset or a liability.

Is Depreciation Expense an Asset or a Liability?

Depreciation expense is recorded on the income statement as an expense, representing how much of an asset’s value has been used up for that year. It is neither an asset nor a liability.

The Bottom Line

Companies can depreciate their assets for accounting and tax purposes, and they have a number of different methods to choose from. Whichever way they decide to calculate it, depreciation expense will represent the amount for a single period and accumulated depreciation is the sum of depreciation expenses recorded for the asset up to that point.