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

By

澳洲幸运5开奖号码历史查询:The Investopedia Team

Updated September 05, 2024

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Melody Bell

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Vikki Velasquez

Depreciation🐼 Expense vs. Accumulated Depreciation: ಞAn Overview

The difference between depreciation expense and 澳洲幸运5开奖号码历史查询:accumulated depreciation is that depreciation appears as an expense on the income statement and accumulated depreciation is a 澳洲幸运5开奖号码历史查询:contra asset reported on the balance sheet.

Both relate to the "澳洲幸运5开奖号码历史查询:wearing out" of equipment, machinery, or another asset, however. They help to state the true value of⛎ th🅰e asset. This is an important consideration when taking year-end tax deductions and when a company is being sold.

Key Takeaways

Depreciation expense is reported on the income statement just like any other normal business expense.
Accumulated depreciation is a running total of depreciation expense that's reported on the balance sheet.
Both depreciation and accumulated depreciation relate to the "wearing out" of a company's assets.
Depreciation expense is the amount that a company's assets are depreciated for a single period such as a quarter or the year. Accumulated depreciation is the total amount of wear to date.
Depreciation expense isn't an asset and accumulated depreciation isn't an expense.

Depreciation Expense

Depreciation expense is reported on the income statement just like any other normal business expense. The expense is listed in the 澳洲幸运5开奖号码历史查询:operating expenses area of the income statement if the asset is used for production. This amount reflects a portion of the 澳洲幸运5开奖号码历史查询:acquisition cost of the asset for production purposes.

Factory machines that are used to produce a clothing company's main product have attributable revenues and costs. The company assumes an asset life and scrap value to determine attributable depreciation.

The depreciation expense for a $500,000 machine that's expected to have a value of $100,000 in five years is $80,000 per year. This is 澳洲幸运5开奖号码历史查询:calculated as ($500,000 - $100,000) / 5 = $80,000.

Important

The guidance for determining scrap value and life expectancy can be ambiguous. Investors should be wary of overstated life expectancies and scr🔥ap values.

Accumulated Depreciation

Accumulated depreciation is a running total of depreciation expense for an asset that's recorded on the balance sheet. An asset's original value is adjusted during each 澳洲幸运5开奖号码历史查询:fiscal year to reflect a current, depreciated value.

The machine in our example above that was purchased for $500,000 is reported with a value of $300,000 in the third year of ownersﷺhip. This tactic is often used to depreciate assets beyond their real value. Companies may do this so they can claim higher depreciation deduction🐟s on their tax returns and because it stretches the difference between revenue and liabilities. This makes the company seem more profitable than it is.

Investors should pay close attention to ensure that management isn't boosting 澳洲幸运5开奖号码历史查询:book value through depreciation-calculating tactics.

Key Differences

Depreciation is used on an 澳洲幸运5开奖号码历史查询:income statement for almost every business. It's listed as an expense so it should be used whenever an item is calculated for year-end tax purꦰposes or to determine the validity of the item for liquidation purposes.

Accumulated depreciation isn't usually listed separately on the balance sheet where long-term assets are shown at their carrying value net of accumulated depreciation. This information isn't available so it can be difficult to analyze the amount of accumulated depreciation attached to a company's assets.

Is Accumulated Depreciation Equal to Depreciation Expense?

No. Depreciation expense is the amount that a company's assets are depreciated for a single period such as a quarter or the year. Accumulated depreciation is the total amount that a company has depreciated its assets to date.

Is Depreciation Expense a Current Asset?

No. Depreciation expense is reported on the income statement along with other normal business expenses. Accumulated depreciation �🗹�is listed on the balance sheet.

Is Accumulated Depreciation an Expense?

No. Accumulated depreciation is a 澳洲幸运5开奖号码历史查询:measure of the total wear on a company's assets. It's the total of all depreciation expenses incurred to date.

The Bottom Line

The annual depreciation expense shown on a company's income statement is usually easier to find than the accumulated depreciation on the balance sheet.

The annual depreciation expense is often added back to earnings before interest and taxes (EBIT) to calculate ear🦂🅘nings before interest, taxes, depreciation, and amortization (EBITDA) because it's a large non-cash expense. Accumulated dep🎐reciation can be useful in calculating the age of a c🍬ompany's asset base but it's not often disclosed clearly on financial statements.

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