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. Show
Definition of Accumulated DepreciationAccumulated depreciation reports the total amount of depreciation that has been reported on all of the income statements from the time that the assets were put into service until the date of the balance sheet. The account Accumulated Depreciation is a contra asset account because it will have a credit balance. The credit balance is reported in the property, plant and equipment section of the balance sheet and it reduces the cost of the assets to their carrying value or book value. Example of Depreciation Expense and Accumulated DepreciationTo illustrate, let's assume that a retailer purchases new display racks at a cost of $84,000. This asset is estimated to have a useful life of 7 years (84 months) and no salvage value at the end of 7 years. Assuming the retailer uses the straight-line depreciation method, during each month of the display racks' lives the retailer's monthly income statement will report depreciation expense of $1,000. However, the credit balance in Accumulated Depreciation will be reported on the balance sheet at $1,000 at the end of the first month, $2,000 at the end of the second month, $3,000 at the end of the third month, etc. until the balance in Accumulated Depreciation reaches $84,000 at the end of the 84th month. Accumulated depreciation accounts are asset accounts with a credit balance (known as a contra asset account). It is considered a contra asset account because it contains a negative balance that intended to offset the asset account with which it is paired, resulting in a net book value. It appears on the balance sheet as a reduction from the gross amount of fixed assets reported. Accumulated depreciation is not an asset because balances stored in the account are not something that will produce economic value to the business over multiple reporting periods. Accumulated depreciation actually represents the amount of economic value that has been consumed in the past. This article will also discuss: Is Accumulated Depreciation a Current Asset or Fixed Asset? What Is Accumulated Depreciation Classified as on the Balance Sheet? Is Accumulated Depreciation a Current or Long-Term Asset? NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area. Is Accumulated Depreciation a Current Asset or Fixed Asset?As we mentioned above, depreciation is not a current asset. It is also not a fixed asset. Depreciation is the method of accounting used to allocate the cost of a fixed asset over its useful life and is used to account for declines in value. It helps companies avoid major losses in the year it purchases the fixed assets by spreading the cost over several years. Current assets are not depreciated because of their short-term life. What Is Accumulated Depreciation Classified as on the Balance Sheet?The total decrease in the value of an asset on the balance sheet over time is accumulated depreciation. The values of all assets of any type are put together on a balance sheet rather than each individual asset being recorded. No accumulated depreciation will be shown on the balance sheet. A machine purchased for $15,000 will show up on the balance sheet as Property, Plant and Equipment for $15,000. Over the years the machine decreases in value by the amount of depreciation expense. In the second year, the machine will show up on the balance sheet as $14,000. The tricky part is that the machine doesn’t really decrease in value – until it’s sold. So, the asset shows up in two different accounts: the asset’s depreciated cost and accumulated depreciation. The total of the two is the original cost of the asset. The difference between the two is the book value of that asset. The assets’ value on the balance sheet is expressed as:
Is Accumulated Depreciation a Current or Long-Term Asset?Accumulated depreciation is an asset account with a credit balance known as a long-term contra asset account that is reported on the balance sheet under the heading Property, Plant and Equipment. The amount of a long-term asset’s cost that has been allocated, since the time that the asset was acquired. Depreciation expense is the periodic depreciation charge that a business takes against its assets in each reporting period. The intent of this charge is to gradually reduce the carrying amount of fixed assets as their value is consumed over time. What is Accumulated Depreciation?Accumulated depreciation is the cumulative amount of depreciation that has piled up since the initiation of depreciation for each asset. This information is stored in a contra asset account, which effectively reduces the balance of the fixed asset account with which it is paired. Comparing Depreciation Expense and Accumulated DepreciationThe following differences apply to the two concepts:
Example of Depreciation Expense and Accumulated DepreciationQuest Adventure Gear buys an automated industrial sewing machine for $60,000, which it expects to operate for the next five years. Quest uses straight-line depreciation. Based on the 60-month useful life of the machine, Quest will charge $12,000 of this cost to depreciation expense in each of the next five years. At the end of the first year, the related amount of accumulated depreciation will be $12,000, followed by $24,000 at the end of the second year, $36,000 at the end of the third year, $48,000 at the end of the fourth year, and $60,000 at the end of the fifth year. What is the difference between the cost of an asset and the?Costs are related to buying business assets, and they're shown on the business balance sheet. The cost of an asset is usually depreciated (spread over time). Expenses are related to business expenditures over time, and they are shown on the business net income (profit and loss) statement.
What is the cost of an asset?Cost of assets represents the monetary costs involved in acquiring, installing and commissioning assets. In simple words, it includes the money involved in purchasing assets and putting them to use for their purposes.
What is the difference between a fixed asset and an expense?A fixed asset is a tangible asset that is purchased to serve a business purpose. The business expects to own these items for a year or more. Examples of common fixed assets include land, buildings, vehicles and equipment. In contrast, an expense often involves the purchase of an item that will be immediately consumed.
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