Accumulated depreciation is the sum of all depreciation expenses on a company’s assets (sum of the value that assets lose since they start operation). On the other hand, depreciation expense is the degree (in value) to which a machinery, equipment, or tool depreciates over the period of time (say a month or a year). The accumulated depreciation refers to the sum of all depreciation expenses since the machinery, tool, or equipment started operating.
Understanding Accumulated Depreciation Further
Accumulated depreciation is entered on the balance sheet as credit where it is subtracted from the gross initial amount of the fixed assets.
The accumulated depreciation of an asset increases the more equipment depreciates. This amount continues to be credited against a company’s assets. When a company cannot use the equipment any more, the accumulated depreciation amount is no longer entered on the income statement.
Depreciation Expenses Explained
Depreciation expense refers to the value the fixed assets of a company lose over a given period. Depreciation expense is subtracted from the company’s net income on the company’s income statement. Accountants debit depreciation expense and credit accumulated depreciation.
The company does not incur any cost in repair of the asset; the asset just loses value by wearing out. This is why depreciation expense appears as a non-cash expense.
Accumulated Depreciation and Book Value
Accumulated depreciation is applied when calculating the income statement value of an asset. Book value refers to the amount a company considers an asset to be worth and what is entered on the balance sheet. The net worth of an asset refers to its cost minus the accumulated depreciation. For instance, if a company buys machinery worth $450,000 and its accumulated depreciation after a few years is $150,000, the income statement value of the asset is $300,000.
Accumulated depreciation only comes close to the original price of the asset but will never exceed it. Once the asset is old or the company sells off the asset, accumulated depreciation is revered and no longer has to appear on the income statement. Net income statement value does not necessarily reflect an asset’s market value.
Depreciation expense is always subtracted from the company’s income as an expense. On the other hand, accumulated depreciation should appear below the depreciation expense as a running total (but it is never listed there). Both the accumulated depreciation and depreciation expense are essential in calculating the net income of a company.