What is the Difference Between Depreciation and Accumulated Depreciation
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They are related. Depreciation is the amount of fixed assets used up during an accounting period. It is reported in the income statement as an expense. Accumulated depreciation is a contra asset account in which all past depreciation expense for an asset is recorded. Let's look at an example.
You buy equipment (an asset) for $10,000 with a useful life of 10 years and no salvage value. The equipment account is debited $10,000 and cash is credited. Each year that passes 10 percent of the equipment is used up. The equipment may appear the same, but its useful life is shorter. You have gotten 1/10th of the benefit from your investment.
Using up an asset is an expense. To record the expense, you debit an expense account and reduce the cost of the asset by the amount used up. With equipment however, we don't reduce the $10,000 cost directly. We create a contra-asset account called accumulated depreciation, to that the cost is maintained in the asset account. At the end of the first year of use the entry is
dr - depreciation expense..........1,000 cr - accumulated depreciation ...................1,000
The expense is reported on the income statement. The accumulated depreciation account now has a $1,000 credit and is reported on the balance sheet right after the equipment account. The $10,000 debit in equipment less the $1,000 credit in accumulated depreciation shows that the book value of the asset is $9,000.
Next year the process is repeated, and accumulated depreciation will grow to $2,000. The equipment will have a book value of $8,000, and so on year after year. Each year the depreciation expense is $1,000 and the book value of the equipment declines.
Remember that the income statement accounts (temporary accounts) are closed at the end of the year, while the accumulated depreciation (a permanent account) keeps growing.
You buy equipment (an asset) for $10,000 with a useful life of 10 years and no salvage value. The equipment account is debited $10,000 and cash is credited. Each year that passes 10 percent of the equipment is used up. The equipment may appear the same, but its useful life is shorter. You have gotten 1/10th of the benefit from your investment.
Using up an asset is an expense. To record the expense, you debit an expense account and reduce the cost of the asset by the amount used up. With equipment however, we don't reduce the $10,000 cost directly. We create a contra-asset account called accumulated depreciation, to that the cost is maintained in the asset account. At the end of the first year of use the entry is
dr - depreciation expense..........1,000 cr - accumulated depreciation ...................1,000
The expense is reported on the income statement. The accumulated depreciation account now has a $1,000 credit and is reported on the balance sheet right after the equipment account. The $10,000 debit in equipment less the $1,000 credit in accumulated depreciation shows that the book value of the asset is $9,000.
Next year the process is repeated, and accumulated depreciation will grow to $2,000. The equipment will have a book value of $8,000, and so on year after year. Each year the depreciation expense is $1,000 and the book value of the equipment declines.
Remember that the income statement accounts (temporary accounts) are closed at the end of the year, while the accumulated depreciation (a permanent account) keeps growing.
